FICs and Trusts Compared for Inheritance Tax, Control, Property Investment and Passing Wealth to Future Generations
By Steve Bicknell FCMA, CGMA
Family Investment Company vs Discretionary Trust is becoming an increasingly important comparison for families looking to pass wealth to children and grandchildren while retaining control.
Both structures can be used for long-term family wealth planning.
Both can separate control from the people who ultimately benefit from the wealth.
Both can potentially help move value or future growth away from an individual’s estate.
But they work in fundamentally different ways and have very different tax consequences.
And sometimes the answer isn’t:
FIC OR TRUST.
It is:
FIC + TRUST.
Quick Answer – FIC or Discretionary Trust?
A Family Investment Company is generally stronger for investing and compounding substantial family wealth while retaining control. A discretionary trust is generally stronger where flexibility, asset protection and future or unknown beneficiaries are the priority. For some families, a discretionary trust owning growth shares in a FIC can combine advantages of both.
The important distinction is that a:
FAMILY INVESTMENT COMPANY IS PRIMARILY AN INVESTMENT VEHICLE
whereas a:
DISCRETIONARY TRUST IS PRIMARILY AN OWNERSHIP AND SUCCESSION STRUCTURE.
That distinction drives much of the tax treatment.
| Family Investment Company | Discretionary Trust | |
|---|---|---|
| Legal structure | Company | Trust |
| Who controls it? | Directors/shareholders | Trustees |
| Beneficiaries/shareholders have fixed rights? | Depends on share rights | Beneficiaries usually do not |
| Future generations | Good | Very flexible |
| Large sums can be invested | Yes | Yes, but IHT entry charges need considering |
| Immediate IHT charge on creation | Not necessarily | Can arise |
| 10-year IHT charges | No company-level 10-year charge | Potentially yes |
| Tax on retained income | Corporation Tax | Trust Income Tax |
| Property investment | Often attractive | Possible |
| Founder can retain control | Potentially strong | Trustees control |
| Original capital accessible | Potentially via loan account | Generally much less flexible |
| Asset protection | Depends on shareholder | Potentially stronger |
| Future/unknown beneficiaries | More difficult | Excellent |
| Administration | Company compliance | Trust compliance |
| Best suited to | Investment and future growth | Flexibility and succession |
Let’s look at why.
What Is a Family Investment Company?
A Family Investment Company, usually abbreviated to FIC, is normally a private limited company whose shareholders are members of the same family.
It might hold:
- residential property;
- commercial property;
- shares;
- investment funds;
- cash;
- loans;
- or a combination of investments.
Different classes of shares can have different rights to:
- votes;
- dividends;
- capital;
- and future growth.
That can allow parents or grandparents to retain:
CONTROL
while children, grandchildren or trusts participate in:
FUTURE GROWTH.
HMRC itself investigated FICs through a specialist unit established in April 2019.
HMRC found that FICs were commonly used for intergenerational wealth planning, often using different share classes so older generations retained voting rights while younger generations had rights to income or capital. HMRC also found no evidence that people establishing FICs were more inclined towards avoidance or non-compliant behaviour. The specialist project was subsequently ended and FICs became part of HMRC’s normal compliance activity.
So a FIC isn’t a special HMRC tax scheme.
It is a company whose share rights, funding and transactions are designed around a family’s long-term objectives.
What Is a Discretionary Trust?
A discretionary trust works very differently.
Assets are legally held by:
TRUSTEES
for a class of:
BENEFICIARIES.
Those beneficiaries might include:
- children;
- grandchildren;
- future grandchildren;
- spouses;
- other descendants;
- or other people identified in the trust deed.
The critical feature is that an individual discretionary beneficiary does not normally have an absolute entitlement to a particular trust asset.
Instead, the trustees decide, subject to the trust deed and their legal duties:
- which beneficiaries receive income;
- which receive capital;
- when distributions are made;
- and how much they receive.
This creates considerable flexibility.
The Biggest Difference – Who Owns the Value?
This is perhaps the easiest way to understand the difference.
With a FIC
Value is represented by:
SHARES
and potentially:
SHAREHOLDER LOANS.
The rights attached to each share class determine who has:
- votes;
- dividend rights;
- capital rights;
- and future growth.
If your adult daughter owns growth shares, she genuinely owns those shares.
With a discretionary trust
The:
TRUSTEES OWN THE ASSETS
and manage them for the beneficiaries.
A discretionary beneficiary does not ordinarily own a particular percentage of the trust fund.
That means:
FIC = DEFINED SHAREHOLDER RIGHTS
whereas:
TRUST = TRUSTEE DISCRETION.
£1 Million – FIC vs Discretionary Trust
Let’s use a completely fictional family.
David and Emma Taylor have accumulated:
£1,000,000
which they want to invest for the long-term benefit of their family.
They have two adult children:
Alex and Sophie
and expect grandchildren in future.
They are considering two options.
Option 1 – £1 Million Family Investment Company
David lends:
£1,000,000
to:
Taylor Family Investments Ltd.
Initially, the balance sheet might broadly look like this:
| £ | |
|---|---|
| Cash/investments | 1,000,000 |
| Loan owed to David | (1,000,000) |
| Initial net company value | approximately nil |
The company then invests the money.
The family might establish:
Control shares
held by David and Emma
and:
Growth shares
held by Alex and Sophie.
If the investments eventually become worth:
£3,000,000
the original £1 million loan still belongs to David to the extent it hasn’t been:
- repaid;
- spent;
- gifted;
- or otherwise transferred.
But much of the:
£2 MILLION FUTURE GROWTH
could potentially accrue to the growth shares.
The important point is:
THE FIC HASN’T MAGICALLY REMOVED £1 MILLION FROM DAVID’S ESTATE.
Instead, it can potentially:
REDIRECT FUTURE GROWTH.
Option 2 – £1 Million Discretionary Trust
Suppose instead David transfers:
£1,000,000
directly into a discretionary trust.
This is fundamentally different.
David has transferred the assets to trustees.
But that immediately raises:
INHERITANCE TAX.
A transfer of assets into a relevant-property trust is normally an immediately chargeable transfer for IHT purposes.
That means a substantial lifetime transfer into a discretionary trust can create an immediate IHT charge.
And once the assets are within the relevant-property regime, there can potentially be further charges:
EVERY 10 YEARS
and:
WHEN ASSETS LEAVE THE TRUST.
This is one of the most important differences between a FIC and a discretionary trust.
The £325,000 Trust Issue
The standard IHT nil-rate band is currently:
£325,000.
There is no rule saying that a discretionary trust cannot hold more than £325,000.
It absolutely can.
The issue is the potential:
INHERITANCE TAX ENTRY CHARGE.
If an individual transfers assets into a discretionary relevant-property trust, the transfer is generally immediately chargeable.
Subject to available exemptions, reliefs, the settlor’s previous chargeable transfers and the available nil-rate band, amounts above the available threshold can create lifetime IHT.
The lifetime rate is generally 20% where the tax is borne by the person making the transfer.
So:
£325,000 IS NOT A MAXIMUM TRUST SIZE.
It is relevant because of the IHT calculation.
This is one reason a FIC can be more practical where a family has £1 million, £2 million or considerably more to invest.
But remember:
LENDING £1 MILLION TO A FIC DOES NOT REMOVE THE £1 MILLION FROM YOUR ESTATE.
The loan is still an asset.
FIC vs Trust – What Happens to £1 Million?
A useful way of thinking about it is:
FIC
£1m loan
↓
FIC invests £1m
↓
Founder still owns the £1m loan
↓
Growth shares can potentially capture future growth
MAIN OBJECTIVE:
MOVE FUTURE GROWTH
DISCRETIONARY TRUST
£1m transferred to trustees
↓
Potential immediate IHT considerations
↓
Trustees control the assets
↓
10-year and exit-charge regime can apply
MAIN OBJECTIVE:
MOVE ASSET OWNERSHIP INTO A FLEXIBLE SUCCESSION STRUCTURE
That is why comparing the two simply by looking at tax rates misses the point.
What About the Seven-Year Rule?
This is another area where confusion often arises.
Suppose David gives shares outright to his adult daughter Sophie.
An outright lifetime gift to an individual will generally be a:
POTENTIALLY EXEMPT TRANSFER.
If David survives seven years, it can generally fall outside his estate for IHT purposes.
A transfer into a discretionary relevant-property trust is different.
It is normally an:
IMMEDIATELY CHARGEABLE TRANSFER.
HMRC confirms that a transfer into a relevant-property trust is immediately chargeable, with further consequences possible if the settlor dies within seven years.
So:
“Put it into trust and survive seven years”
is an oversimplification.
The 10-Year Discretionary Trust Charge
Most assets held in a discretionary trust are within the:
RELEVANT PROPERTY REGIME.
HMRC confirms that relevant-property trusts can face an IHT charge at each:
10-YEAR ANNIVERSARY.
The rate can be:
UP TO 6%.
The calculation is more complicated than simply applying 6% to everything. It depends on factors including the value of the relevant property, available nil-rate band and relevant historic transfers.
A FIC itself does not have an equivalent ten-year company IHT charge.
However, if a discretionary trust owns shares in the FIC:
THE VALUE OF THOSE SHARES MAY FORM PART OF THE TRUST’S RELEVANT PROPERTY.
So using a trust to own FIC shares doesn’t make the trust’s IHT regime disappear.
What Are Trust Exit Charges?
IHT can also potentially arise when relevant property leaves a discretionary trust.
These are commonly called:
EXIT CHARGES
or:
PROPORTIONATE CHARGES.
They can arise where, for example:
- capital is appointed to a beneficiary;
- a beneficiary becomes absolutely entitled to an asset;
- or property otherwise ceases to be relevant property.
HMRC confirms that relevant-property trusts have both ten-year charges and proportionate/exit charges.
The calculation depends on the circumstances and how long the property has been within the relevant-property regime.
Income Tax – A Major Difference
The tax on investment income can make a significant difference between the two structures.
For 2026/27, trustees of accumulation and discretionary trusts generally pay:
Dividend-type income
39.35%
Other income
45%.
There is normally a £500 tax-free amount, although this can be divided where the same settlor has established multiple accumulation or discretionary trusts. Trustees do not receive the individual dividend allowance.
This can make accumulating substantial investment income within a discretionary trust expensive.
How Does That Compare With a FIC?
A company pays:
CORPORATION TAX
rather than trust Income Tax.
A FIC holding a portfolio of shares, cash and similar investments may be a:
CLOSE INVESTMENT-HOLDING COMPANY.
A close investment-holding company is subject to the Corporation Tax main rate and cannot use the small-profits rate or marginal relief.
That currently means:
25% CORPORATION TAX
on taxable profits.
This can make a FIC considerably more attractive than a discretionary trust where investment returns will be:
RETAINED
and:
REINVESTED.
But Don’t Forget Tax When Money Leaves the FIC
This is crucial.
Suppose a FIC makes:
£100,000
of taxable profit.
The company may pay Corporation Tax first.
If the remaining profits are then paid to an individual shareholder as a dividend:
DIVIDEND TAX
may also arise.
So you cannot simply compare:
25% COMPANY TAX
with:
45% TRUST TAX
and conclude that the FIC always wins.
The FIC is often particularly effective where profits can remain inside the company and compound over a long period.
If all the profits need to be extracted personally every year, the comparison can look very different.
Trust Distributions and the Tax Pool
Trust taxation has another layer of complexity.
When trustees make discretionary income payments to beneficiaries, the payments carry a tax credit and the trustees have to maintain a:
TAX POOL.
HMRC describes the tax pool as the record used to track Income Tax paid by trustees and the tax credits attached to discretionary income payments. If the pool does not contain enough tax to support distributions, the trustees can have additional tax to pay.
A beneficiary may potentially recover some tax depending on their own circumstances.
That can make trusts useful where distributions eventually go to low-income adult beneficiaries.
But it adds another layer of administration.
Which Gives the Family More Control?
Both can provide control.
But it is a different kind of control.
Family Investment Company
Parents or grandparents might retain:
- voting shares;
- directorships;
- investment decision-making;
- and influence over dividend policy.
Meanwhile younger generations can own growth shares.
This allows a useful separation between:
CONTROL
and:
FUTURE ECONOMIC VALUE.
Discretionary Trust
The trustees control:
- investments;
- distributions;
- administration;
- and when beneficiaries receive capital.
The settlor can potentially also be a trustee, depending on the structure.
But trustees don’t own the assets beneficially.
They have legal duties and must act according to:
THE TRUST DEED
and:
THEIR DUTIES TO THE BENEFICIARIES.
Which Is Better for Minor Children?
A discretionary trust can be particularly useful where the intended beneficiaries are:
- young children;
- grandchildren;
- future grandchildren;
- or people whose circumstances may change considerably.
Instead of giving assets directly to a child, trustees can decide:
WHEN
and:
HOW
the beneficiary should receive them.
Direct ownership of FIC shares by minor children can also create additional legal and tax complications, including the parental settlements rules where income has been provided by a parent.
So where the beneficiaries are very young:
THE FLEXIBILITY OF A TRUST CAN BE VERY VALUABLE.
Which Is Better for Adult Children?
The FIC can become more attractive where children are adults.
An adult child can genuinely own:
- growth shares;
- dividend shares;
- voting shares;
- or a combination.
This can simplify future distributions because dividends can potentially be paid directly to the shareholder.
But there is an important consequence:
THEY REALLY OWN THE SHARES.
The shares form part of their personal wealth.
That brings us to asset protection.
Divorce, Bankruptcy and Asset Protection
Suppose Alex personally owns valuable FIC growth shares.
Those shares are his assets.
They could potentially become relevant in circumstances involving:
- divorce;
- bankruptcy;
- creditors;
- or death.
A discretionary beneficiary, by contrast, doesn’t ordinarily own a specified percentage of the trust fund.
The trustees decide whether and when to make distributions.
That can make a discretionary trust attractive where:
ASSET PROTECTION AND CONTROL OVER FUTURE DISTRIBUTIONS
are important family objectives.
This should not be viewed as guaranteed protection from every possible claim — family and insolvency law can be complex — but it is an important structural distinction.
What About Future Grandchildren?
This is one of the areas where a discretionary trust can be particularly powerful.
Suppose David and Emma currently have:
NO GRANDCHILDREN.
It is difficult to give shares today to people who don’t yet exist.
A discretionary trust can potentially define a class of beneficiaries that includes:
- existing children;
- existing grandchildren;
- future grandchildren;
- and potentially further descendants.
That means the family doesn’t necessarily need to decide today:
EXACTLY WHO SHOULD RECEIVE THE WEALTH IN 20 YEARS.
The trustees can respond to future circumstances.
Sometimes the Answer Is FIC + Trust
This is where the comparison gets particularly interesting.
You don’t necessarily have to choose between:
FAMILY INVESTMENT COMPANY
and:
DISCRETIONARY TRUST.
You can potentially combine them.
For example:
David and Emma
hold:
A CONTROL SHARES
in Taylor Family Investments Ltd.
Alex and Sophie
hold:
B GROWTH SHARES.
And:
TAYLOR FAMILY DISCRETIONARY TRUST
holds:
C GROWTH SHARES
for the potential benefit of:
- children;
- grandchildren;
- future grandchildren;
- and other permitted family beneficiaries.
The:
FIC
acts as the:
INVESTMENT VEHICLE.
The:
TRUST
provides:
FLEXIBILITY OVER FUTURE BENEFICIARIES.
This can be a very powerful combination.
Why Put Growth Shares Into the Trust?
Suppose the company initially has a relatively low value because it is largely funded by a shareholder loan.
A trust might acquire an appropriately structured class of growth shares while their value is low.
If the company then grows substantially over the next 20 years, some of that future growth may accrue to the trust-owned shares.
That can potentially allow future value to be held for a much wider family group.
But:
VALUATION IS CRITICAL.
The trust acquiring shares with genuine existing value for less than market value can create tax consequences.
The structure should therefore be designed before substantial value has accumulated rather than attempting to move valuable shares later.
FIC + Trust Does Mean More Administration
Combining the two structures means complying with:
TWO SETS OF RULES.
The company may require:
- bookkeeping;
- annual accounts;
- Corporation Tax returns;
- confirmation statements;
- shareholder records;
- board minutes;
- dividend documentation.
The trust may require:
- Trust Registration Service registration;
- trustee records;
- Trust and Estate Tax Returns;
- tax-pool records;
- IHT calculations;
- ten-year anniversary reviews;
- exit-charge calculations.
So:
DON’T ADD A TRUST JUST BECAUSE IT SOUNDS SOPHISTICATED.
There should be a clear reason for it.
Which Is Better for Property Investment?
For building a substantial long-term property portfolio, a FIC can have significant practical advantages.
A company can:
- own multiple properties;
- borrow;
- reinvest profits;
- deduct qualifying finance costs under the corporate rules;
- and retain profits for future purchases.
An individual residential landlord is subject to the Section 24 finance-cost restriction.
A company is not subject to Section 24 in the same way.
There is also an important Corporation Tax point.
A close company can fall outside close investment-holding company status where it exists wholly or mainly for commercial investment in land that is let, or intended to be let, to unconnected persons.
But connected lettings can prevent that exception applying.
So:
PROPERTY FICs CAN HAVE A DIFFERENT CORPORATION TAX POSITION FROM SECURITIES-BASED FICs.
What About Existing Property?
This needs particular care.
Suppose David already personally owns a rental property worth:
£750,000.
Transferring that property into a FIC can potentially trigger:
CAPITAL GAINS TAX
and:
STAMP DUTY LAND TAX.
Putting the property into a discretionary trust can raise:
CGT
IHT
and potentially:
SDLT
depending on the facts, including any debt.
So the decision:
“FIC or trust?”
shouldn’t be made before calculating:
THE COST OF GETTING THE ASSET INTO THE STRUCTURE.
Sometimes the tax cost of transferring existing assets outweighs the future benefits.
Which Is Better for Shares and Investment Portfolios?
Where a substantial portfolio is intended to generate income that will be:
RETAINED AND REINVESTED,
a FIC can be attractive.
A securities-based FIC may pay Corporation Tax at the main rate where it is a close investment-holding company.
A discretionary trust can pay 45% on most income and 39.35% on dividend-type income.
Many dividends received by companies can also fall within the corporate dividend exemption regime, subject to the detailed rules.
This can make the corporate structure particularly useful for:
LONG-TERM COMPOUNDING.
But if the shareholders need all the profits personally every year, the eventual extraction tax must also be included.
Which Is Better for Inheritance Tax?
Neither answer is universally better.
They achieve different things.
Family Investment Company
A FIC can be particularly effective at:
REDIRECTING FUTURE GROWTH.
For example, the parent might retain a £1 million loan while future growth accrues to children’s or trust-owned growth shares.
But the £1 million loan remains within the parent’s estate unless something else is done with it.
Discretionary Trust
A discretionary trust can transfer ownership of assets away from the settlor and provide substantial flexibility over future beneficiaries.
But transfers into a relevant-property trust can be immediately chargeable and the trust can then face:
- 10-year charges;
- exit charges;
- and high Income Tax rates.
So:
A TRUST IS NOT SIMPLY A WAY OF AVOIDING 40% INHERITANCE TAX.
Can the Founder Continue to Benefit?
This needs careful thought in either structure.
FIC
If the founder has lent £1 million to the company, the company can potentially repay that loan.
The founder may also retain genuine rights attached to their own shares.
But value genuinely transferred to other shareholders cannot simply be treated as though it still belongs entirely to the founder.
Trust
If someone gives assets away but continues to benefit from them, the:
GIFT WITH RESERVATION OF BENEFIT
rules may become relevant.
There are also separate Income Tax rules for settlor-interested trusts.
So if the objective is to move assets outside an estate:
THE DONOR CANNOT SIMPLY GIVE THEM AWAY ON PAPER AND CONTINUE USING THEM AS BEFORE.
Advantages of a Family Investment Company
A FIC can potentially offer:
1. Lower tax on retained investment profits
Particularly compared with discretionary trust Income Tax rates.
2. Long-term compounding
Profits can remain within the corporate structure.
3. Loan-account flexibility
The original funder may retain access to loan repayments.
4. Control
Voting shares and directorships can allow the older generation to retain substantial control.
5. Growth-share planning
Future value can potentially accrue to younger generations.
6. Property investment
Companies can be particularly useful for leveraged property portfolios.
7. No company-level 10-year IHT charge
Unlike the relevant-property trust regime.
8. Direct adult family ownership
Adult children can hold genuine shares and receive dividends directly.
Disadvantages of a Family Investment Company
Potential disadvantages include:
1. Double taxation on extraction
Corporation Tax can be followed by dividend tax.
2. Shareholders genuinely own their shares
That can have consequences on divorce, bankruptcy and death.
3. Less beneficiary flexibility
It is harder to provide for unknown future beneficiaries than with a discretionary trust.
4. Valuation
Growth shares and freezer shares can require specialist valuation.
5. Legal drafting
Different share rights require carefully drafted Articles of Association and shareholder arrangements.
6. Annual company compliance
Accounts, Corporation Tax and Companies House filings are required.
7. Existing asset transfers
CGT and SDLT can make moving an established property portfolio expensive.
Advantages of a Discretionary Trust
A discretionary trust can potentially provide:
1. Maximum beneficiary flexibility
Trustees can choose between members of a broad beneficiary class.
2. Future generations
The class can potentially include grandchildren who have not yet been born.
3. Control over distributions
Beneficiaries don’t automatically receive assets simply because they reach 18.
4. Asset protection
Beneficiaries generally do not own specific trust assets outright.
5. Succession
The structure can continue for future generations subject to the trust terms and legal rules.
6. Protection for younger or vulnerable beneficiaries
Trustees can decide when distributions are appropriate.
Disadvantages of a Discretionary Trust
The principal disadvantages include:
1. High Income Tax rates
For 2026/27, 45% on most discretionary trust income and 39.35% on dividend-type income.
2. IHT on entry
Transfers into relevant-property trusts are generally immediately chargeable transfers.
3. Ten-year charges
The rate can be up to 6%.
4. Exit charges
IHT can potentially arise when relevant property leaves the trust.
5. Tax-pool administration
Income distributions can require additional trust tax calculations.
6. Specialist administration
Trustees need to comply with trust, tax and reporting requirements.
FIC vs Discretionary Trust – Which Is Better?
A Family Investment Company may be particularly suitable where:
- substantial capital needs investing;
- investment income will largely be reinvested;
- the founders want access to the original capital;
- adult children can own shares;
- property investment is important;
- retaining corporate control matters;
- and the principal IHT objective is moving future growth.
A discretionary trust may be particularly suitable where:
- flexibility over beneficiaries is crucial;
- children or grandchildren are young;
- future grandchildren need to be included;
- asset protection is important;
- the family doesn’t want beneficiaries owning assets outright;
- and the proposed transfer fits within the family’s wider IHT strategy.
A FIC + discretionary trust may be particularly suitable where:
- a FIC is wanted as the investment vehicle;
- parents want to retain voting control;
- adult children will own some growth directly;
- but part of the future growth should be held flexibly for grandchildren and later generations.
10 Questions Before Choosing a FIC or Trust
1. How much wealth is involved?
A £100,000 decision can be very different from a £5 million decision.
2. Does the founder need the capital back?
If yes, loan funding into a FIC can be very useful.
3. Will investment income be retained or distributed?
This is critical when comparing Corporation Tax with trust Income Tax.
4. Are the beneficiaries adults or minors?
That can significantly change the appropriate structure.
5. Do we know who should ultimately inherit?
If not, discretionary flexibility can be valuable.
6. Do future grandchildren need to be included?
A trust can accommodate a wider future beneficiary class.
7. Is asset protection important?
Direct share ownership and discretionary beneficiary status are very different.
8. What are we investing in?
Property, securities and cash can produce different tax results.
9. Are we transferring existing assets?
Calculate CGT, SDLT and IHT before making the transfer.
10. Would FIC + trust work better than either structure alone?
Sometimes the best answer is not choosing one.
Frequently Asked Questions
Is a Family Investment Company better than a discretionary trust?
Not automatically. A FIC can be particularly effective for investing substantial sums and compounding future growth, whereas a discretionary trust can offer much greater flexibility over who eventually benefits.
Is a trust better for Inheritance Tax than a FIC?
Not necessarily. Transfers into discretionary relevant-property trusts can be immediately chargeable to IHT and the trust can face 10-year and exit charges. A FIC may instead be designed to move future growth, although assets such as shareholder loans retained by the founder remain within their estate.
Can a FIC avoid the 10-year trust charge?
The company itself is not subject to the discretionary trust 10-year IHT regime. But if a discretionary trust owns shares in the FIC, those shares may form part of the trust’s relevant property.
Can I put more than £325,000 into a discretionary trust?
Yes. £325,000 is not a maximum trust size. The issue is that a lifetime transfer above the available IHT nil-rate band can potentially produce an immediate IHT liability.
What tax does a discretionary trust pay in 2026/27?
Accumulation and discretionary trusts generally pay 45% on most income and 39.35% on dividend-type income.
What is the 10-year trust charge?
Relevant-property trusts can face an IHT charge at each ten-year anniversary. The rate can be up to 6%, although the actual calculation depends on the trust’s circumstances.
Can a discretionary trust own shares in a Family Investment Company?
Yes. This can combine the investment function of a FIC with the beneficiary flexibility of a discretionary trust.
Can parents retain control of a FIC?
Potentially. Voting/control shares can be retained by parents while other share classes participate in future growth.
Is a FIC good for property investment?
It can be. Companies are not subject to the residential Section 24 finance-cost restriction in the same way as individual landlords. Commercial property investment companies letting to unconnected persons can also fall outside the close investment-holding company regime.
Is a FIC good for grandchildren?
Potentially, but where grandchildren are young or not yet born, a discretionary trust owning a class of FIC growth shares can sometimes provide greater flexibility than direct ownership.
The Key Question Isn’t “Which Pays Less Tax?”
A Family Investment Company and a discretionary trust do fundamentally different jobs.
So I wouldn’t start with:
“Which structure has the lowest tax rate?”
Instead, I would start with:
WHO NEEDS CONTROL?
WHO NEEDS THE INCOME?
WHO SHOULD BENEFIT FROM FUTURE GROWTH?
DOES THE FOUNDER NEED THEIR ORIGINAL CAPITAL BACK?
ARE THE BENEFICIARIES ADULTS, CHILDREN OR FUTURE GRANDCHILDREN?
DO WE NEED ASSET PROTECTION?
IS THE FAMILY INVESTING IN PROPERTY, SHARES OR BOTH?
WHAT SHOULD HAPPEN TO THE WEALTH IN 10, 20 OR 30 YEARS?
Once those questions have been answered, the tax comparison becomes much more meaningful.
How Bicknell Business Advisers Can Help
At Bicknell Business Advisers, we can help families compare Family Investment Companies, discretionary trusts and combined structures, including:
- FIC feasibility and tax modelling;
- FIC vs trust comparisons;
- loan versus equity funding;
- growth and freezer shares;
- property investment structures;
- Corporation Tax;
- trust taxation;
- Inheritance Tax;
- CGT;
- SDLT;
- associated-company implications;
- share valuation requirements;
- extraction planning;
- and coordination with specialist solicitors for trusts, Articles of Association, wills and other legal documentation.
The objective shouldn’t be to create the most complicated structure.
It should be to create a structure that matches:
WHAT THE FAMILY WANTS ITS WEALTH TO DO OVER THE NEXT 10, 20 OR 30 YEARS.
For some families that will be a:
FAMILY INVESTMENT COMPANY.
For others it will be a:
DISCRETIONARY TRUST.
And for some:
FIC + TRUST
may provide the combination of investment, control and succession flexibility they are looking for.
About the Author
Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, specialising in property taxation, landlord tax planning, SDLT, Capital Gains Tax and property company structures throughout the UK.
