Funding a Family Investment Company with a Loan: How It Works

Lots of Family Investment Companies (FICs) are funded partly by a loan from the parents. The attraction is simple: the founders can get their money back in a form that is not taxed as income. The arrangement also has limits, and it pays to know them before you start.

What the loan is

You lend cash to the company. It invests the money and owes you the debt. A company pays no corporation tax on money lent to it by a director or shareholder, so making the loan is not a taxable event.

Over time the company repays you. Repayments of the loan principal are a return of your own money, so they are not taxed as income. No single statute says so in terms, but it is well-established practice, and everything depends on the records showing clearly what is principal and what is not.

That makes the loan a flexible source of cash. You can set a repayment plan, or draw what you need when you need it, up to the balance owed and what the company can afford.

A worked example

Say you lend £1m and the company invests it. You agree to take £50,000 a year back. Each payment is your own money returning to you, and no income tax is due. If the company could meet every payment, the loan would be cleared after 20 years.

Compare that with drawing £50,000 a year as dividends, which would be taxable income. This is why a loan is normally the first source of money from the company, and why dividends tend to come later.

What the loan does for inheritance tax

This is the point families misunderstand most. The loan itself stays in your estate. It is an asset, a debt owed to you, valued at the amount outstanding until it is repaid or given away. If you died with £700,000 still owing, that £700,000 would form part of your estate.

What can move outside the estate is the growth on the investments the loan paid for, provided the growth shares belong to your children or a trust. The structure is designed to cap what sits in your estate and to redirect the growth. It does not remove the money you lent.

Money you take back and keep is in your estate again. If you spend it, it has gone as an asset. If you save it, it is taxed in the usual way. So taking repayments reduces the debt but does not by itself take value out of your estate. Our post on freezer shares and growth shares shows how the share classes do the redirecting.

Whether to charge interest

You may charge interest, but you do not have to. If you do:

• the company can usually deduct it;
• it must deduct basic-rate income tax at 20%, pay that over, and report quarterly on form CT61;
• you pay income tax on the interest, and savings tax rates are due to rise from 6 April 2027. It is not yet confirmed whether the CT61 deduction rate will also change.

Many families charge nothing, for simplicity. Others charge interest because they want a return. Either approach works, but decide at the start and record it.

Five things to watch

The loan must be genuine. Keep a written agreement, minutes and accurate accounts. Record repayments against the loan, and keep them apart from dividends.

Do not lend what you may need. The company can repay only what it holds. If investments fall, repayments may slow, and you cannot force it to pay faster than it can.

Do not borrow personally to fund it and expect relief. Income tax relief on interest is not available for a loan used to lend to a close investment-holding company, which covers most investment FICs.

Do not let the company lend to you. A close company that lends to a shareholder can face a charge of 35.75% on loans made from 6 April 2026. It is refundable once the loan is repaid.

Do not release the loan casually. Writing off a debt owed to you by the company is a gift to the company. It is not a potentially exempt transfer and can be an immediately chargeable transfer. By contrast, you can give part of the debt to a child, which is a potentially exempt transfer.

Running the loan well

A loan works only if it is run with some discipline.

• Agree the repayment pattern in advance. It can be fixed or flexible, but the board should minute it.
• Check the company can pay. Repayments come from dividends received, interest and sales of investments, so keep enough in cash or assets that are easy to sell.
• Review it every year. Look at the balance, at whether you are drawing more or less than planned, and at whether the plan still suits you.
• Keep the director's loan account in order. It should show a loan from you to the company, not a mix of repayments, expenses and dividends.

These habits keep the position clear if HMRC ever asks, and they give your executors what they need if you die with the loan still outstanding.

Loan, shares, or both

Most families use a combination. Shares given away, or cash given to children who then take up shares, can reduce the estate over seven years. The loan gives you a route back to your money. Property can also be transferred in, although that raises capital gains tax and stamp duty land tax questions of its own.

For the wider picture, see our Family Investment Company service page.

This article is general information, not advice. If you would like to talk through the numbers with our specialist team, book a call. Our advice is prepared by our specialist team and reviewed by a Chartered Tax Adviser, and your first call is free.

To explore Family Investment Companies further, visit our specialist practice, Family Investment Company.