The headline increase in the corporation tax rate from 19% to 25% from April 2023 announced by the Chancellor, Rishi Sunak, as part of the 2021 Budget, was softened by the announcement that smaller business would be protected.  

This protection comes in the form of the introduction of a new small profits rate whereby companies with profits of £50,000 or less would continue to pay corporation tax at 19%. However, hidden in corporation tax policy paper published on Budget Day was that this small profits rate will not apply to close investment-holding companies (CIHCs). 

A typical family investment company, a private company set up by a family to hold, manage and control the succession of wealth to the younger generation, will be a CIHC and will therefore be subject to corporation tax on its profits at the 25%, rather than the current 19% rate from April 2023. 

The low rate of corporation tax is usually a significant factor for high net-worth families in choosing to set up this form of structure over a trust, and this increase in the tax rate may sway some clients away from this route.  

It is worth bearing in mind that a 25% tax rate is still much lower than the headline rates of income tax.  In addition, dividend income received by the FIC from most other companies in which it holds shares will be tax-free, so depending on the FIC's investment strategy, it should be possible to manage the higher tax burden from 2023 to some extent.

There is some uncertainty as to how this provision affects CIHCs registered outside the UK but the overall purpose of the policy should dictate that these provisions apply equally to such companies.