Finding yourself with significant wealth to leave to your family members might not be a bad situation to be in. 

However, it does present challenges, as ensuring that you can pass as much of your wealth on as possible is easier said than done. 

Depending on the size of your estate, the method you choose to do this could vary dramatically. 

One option is to create a family investment company to manage and pass on wealth to the next generation. 

This is Money sheds light on whether creating a family investment company might be the right move for you to protect your family's inheritance.  

What is a family investment company?

A family investment company, or FIC, is a private limited firm created in order to hold and manage the wealth of one family. This provides an effective method for wealthy individuals to grow and manage their money, as well as pass it on to the next generation.

Family members are usually made shareholders in the company, in order to give them a stake in the estate.

In general, family investment companies come into play when someone has far more wealth than what they need to fund their standard of living.

David Denton, technical consultant at Quilter Cheviot, says: 'FICs are companies set up to hold investments, and allow those who establish them, often known as founders, to facilitate controlled giving of their wealth for IHT planning purposes. 

'This is in contrast to companies that aren't FICs, which are for trading purposes rather than investment purposes.' 

The shares in the company are controlled by members of the family, so that they can have control over the investment decisions made. The founders of the company often take control, while beneficiaries hold shares with capital rights. 

'These will generally be set up using advisers, accountants and solicitors to tailor the company articles to meet client's needs and objectives,' Billy Ambler, financial adviser at Flying Colours, says. 

Should you opt for a family office, family investment company or family trust?

While family offices, FICS and family trusts are all used to manage the wealth of a family, they each have different focuses and aims.

Family offices are private wealth management firms that offer a range of services that are personalised to the individual or family they are set up for.

'Family offices are collectives of legal, tax and other professionals that have the necessary expertise to advise the most wealthy of families, and they may employ FICs as part of a wealth management strategy for the family or families they advise,' Denton says.

Often, family offices are used to deal with more day-to-day financial needs, rather than long-term planning.

Family trusts, on the other hand, offer an alternative to FICs, and are used by wealthy individuals to manager assets for their beneficiaries. 

Tax changes mean that trusts no longer prove an effective way of reducing tax liabilities. However, they are a useful tool ensure that you have control over how your assets are used and managed.

David Goodfellow, head of wealth planning at Canaccord Genuity, says: 'Trusts can be set up for estate planning, asset protection and charitable giving. They can also be beneficial from a tax planning perspective.'

However, Denton warned: 'Because of potentially negative tax consequences of funding a discretionary family trust in excess of £325,000 such arrangements are normally used by those with more modest wealth than those employing a FIC.'

How much money do I need?

There is no minimum requirement for setting up an FIC. However, the costs involved mean that unless you have a large estate, using an FIC won't be worth the benefits you'll get.

Creating an FIC will likely cost at least £5,000, with further costs added depending on the complexity of share classes and the number of properties being transferred.

FICs also come with annual administration fees, which will further eat into your estate. With a large estate, however, these costs are insignificant compared with the amount that can be saved from inheritance tax.

According to accountancy firm Gravita, this figure could be as much as £800,000 on an transfer of £2million.

Nevertheless, while the minimum recommended amount is not set in stone, Quilter Cheviot's David Denton recommends having at least £3million.

Similarly, Goodfellow told This is Money: 'At Canaccord we have FICs that are of about £3million in size. There is no minimum set up amount, but given the costs associated with setting up and maintaining an FIC you would need at least a few million.

'They are suited to high-net-worth individuals or families with substantial assets who want to manage and protect their wealth across generations. They can also be for families who own businesses and want to maintain control and ensure smooth succession.'

There is no upward limit.

How can a family investment company help with inheritance tax planning?

Setting up an FIC can prove an effective method of avoiding the sting of inheritance tax, by making use of the seven-year gifting rule.

'Founders can then gift shares to family members. Gifting shares can help reduce the founder's estate for inheritance tax purposes,' Goodfellow says.

Shares gifted during the lifetime of the shareholder are classed as potentially exempt transfers, and therefore would no longer be part of the founder's estate and would not be subject to inheritance tax if the donor remains alive for seven years after the gift was made.

Goodfellow adds: 'An FIC can benefit from corporate tax rates on capital gains, which are generally lower than personal capital gains tax rates. Retained profits can be reinvested within the company, allowing for compound growth without immediate personal tax liability.'

Typically, FICS can be established with multiple share classes that can be used to provide differing benefits to the founders and beneficiaries.

For example, the founders will hold shares that allow them to retain control over the assets, while also benefitting from dividend rights to provide an income.

Ambler says: 'It could be that the children's shares have no right to capital or income unless approved by the parent's share class; this would meet some requirements to maintain control of the income and assets that children have access to, as they wouldn't have unlimited rights.'

Meanwhile, the beneficiaries' share class is likely to have capital rights, allowing their shares to grow in value with the business, and eventually fall out of the estates of the founders after seven years.

How can I set up an family investment company?

In order to set up an FIC, it is important to seek financial and legal advice in order to ensure that the vehicle meets your family's requirements.

'It can be a complex area, Ambler says, 'so shouldn't be done without taking obtaining suitable advice and guidance.'

Once registered, and appropriately structured, your FIC can be funded by the transfer of your cash or investments.

With the company established, the founders must set out an investment strategy in order to ensure the growth of the FIC.

'Investment managers are employed to ensure expert long term management, with an understanding of the internal taxation of the vehicle, as well as the wishes of the family,' Denton says.