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Family Trusts have long been a cornerstone of estate planning, offering a reliable way to pass wealth to future generations while potentially reducing Inheritance Tax (IHT). However, in recent years, Family Investment Companies (FICs) have gained popularity as a flexible alternative, thanks to their tax efficiencies and adaptable structure. While Trusts have faced criticism due to outdated perceptions and evolving tax rules, FICs have emerged as a modern solution for families seeking to protect and grow their wealth.
Traditionally, a Trust involves transferring assets to trustees who manage them on behalf of beneficiaries. Typically, parents act as settlors and trustees, while children and grandchildren are named as beneficiaries. The Trust deed outlines the powers and responsibilities of the trustees.
In contrast, a Family Investment Company is a private company set up to hold and manage investments for future generations. It offers a more structured approach, where directors oversee the company’s operations, making it an increasingly attractive option for families aiming to maintain control over their wealth.
Comparison of Discretionary Trusts and Family Investment Companies (FICs)
| Aspect | Discretionary Trust | Family Investment Company (FIC) |
|---|---|---|
| Control | Trustees manage and control the trust and must act in the best interests of the beneficiaries. | Directors control the FIC on a day-to-day basis and have fiduciary duties similar to trustees, acting in the best interests of the company and its shareholders. |
| Who Can Benefit | Beneficiaries within the class defined by the trust can benefit. New beneficiaries can often be added under certain powers. | Only shareholders benefit from dividends and capital growth. While the company can employ anyone, the employment must be genuine. |
| Funding with Cash | Trusts can be funded up to an individual’s available nil rate band (£325,000). Amounts exceeding this may incur a lifetime inheritance tax charge of 20%. | Shares can be subscribed to with cash of any value without tax charges. Shares should be subscribed for at market value to avoid tax implications. |
| Funding with Assets | Assets gifted to the trust within the nil rate band avoid inheritance tax, and capital gains can be held over (under s260 TCGA 1992). | Gifts to the FIC are treated similarly to gifts to a trust for inheritance tax purposes. However, no holdover relief applies. Often, assets are sold to the FIC at market value, creating a debt which can be credited to a director as a credit on their Directors Loan Account and can be withdrawn tax free at any time. When transferring property there will be an SDLT charge payable by the FIC |
| Funding with BTL Mortgage Tax on Income | Number of lenders are rare. Rates are typically +5% more than BTL rates for a FIC Trust income is taxed at 45%, or 39.35% for dividend income. | Competitive and wide ranging number of mortgage lenders. Property FICs pay corporation tax at 19 -25% or 0% on dividend income where the income is from rental property. |
| Tax on Capital Gains | Trusts pay capital gains tax at 24% with an annual exemption of £3,000. | Property FICs have no annual exemption and pay corporation tax on capital gains at 19-25%. |
| Distribution of Income | Beneficiaries receive income with a tax credit at 45%. The difference can be reclaimed if they pay tax at a lower rate. The trust must have sufficient tax in its tax pool to cover the tax credit or the trust has to pay the shortfall. | Income is distributed as dividends taxed at the individual’s appropriate dividend tax rate. A £500 annual exemption applies. |
| Distribution of Capital | Capital distributions may trigger an exit charge under the relevant property regime but are not taxable on beneficiaries. | Capital is challenging to distribute but generally a return of capital is not taxable unless it includes a profit element, which may trigger income or capital gains tax. |
| Distribution of Assets | Distributions may give rise to a capital gain, which can be held over. Exit charges may apply under the relevant property regime. | Assets distributed in specie to shareholders may be treated as dividends. The company makes a disposal for tax purposes, and any gain is taxable. |
| Use of Assets | Beneficiaries can use trust assets tax-free. | If a company allows directors or shareholders to use assets, tax charges arise as a benefit in kind |
| Inheritance Tax (IHT) | Trusts pay a 6% charge on the market value of assets above the nil rate band at each 10-year anniversary. Beneficiaries pay no IHT on trust assets. | FICs do not pay IHT. However, shareholders pay IHT on the value of their shares in their estate, subject to the nil rate band and applicable reliefs. Minority discounts may apply. |
| Privacy | Trusts must be registered with HMRC, but the register is not public. | Companies are registered at Companies House, and shareholder details and articles of association are public documents. |
This table outlines the differences between discretionary trusts and FICs, highlighting their respective advantages, limitations, and tax implications.
It should be noted that for Property Family Investment Companies the wide range and availability of mortgage lenders make this ideally suited for property investment where mortgage funding is required. Our experience is that there are literally one or two lenders that will consider a BTL mortgage to a Discretionary Trust and the rates are typically +5% more than for the FIC.
Choosing between a Discretionary Trust and a Family Investment Company (FIC) ultimately depends on your family’s objectives, the assets involved, and your approach to control and tax planning.
It is important to seek professional advice tailored to your unique circumstances. Both options offer significant benefits but also come with specific obligations and potential tax implications.
Simon Thandi
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
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