We often hear the simple question: which route reduces what sits in an older generation’s estate? Over the last decade, FICs have grown in appeal thanks to structure and tax advantages. Trusts have become less popular, partly because of a tougher regime and unfavourable press.
In plain terms, saving inheritance tax usually means reducing estate value over time, not finding a loophole. We will explain how gifting — commonly by passing shares into a FIC or into a discretionary trust — works in real life.
Our aim is practical. We will compare creation charges, the seven-year rule, ongoing trust charges, income and capital gains, plus costs and privacy. This is about the right choice for property, portfolios and passing wealth to children and grandchildren.
For a clear, detailed comparison see our detailed comparison. Often FICs and trusts work together rather than being an either/or decision.
Key Takeaways
- FICs have become more attractive due to structure and favourable charges.
- Trusts still suit certain goals but face a tougher charging regime.
- Saving inheritance tax usually means reducing estate value over time, not exploiting loopholes.
- Choice depends on assets, control needed and family dynamics.
- We will cover creation IHT, seven‑year rules, ongoing charges, CGT and practical costs.
Why inheritance tax planning in the UK often comes down to FICs vs trusts
Choosing how to pass on wealth often comes down to control and timing. We see clients aiming to reduce estate exposure while keeping decision-making close to hand.
Saving inheritance tax usually means shrinking taxable estate value over time, not dodging charges. Good planning needs patience, clear paperwork and realistic expectations about HMRC rules.
What “saving IHT” really means
Most people want two things at once: to move value out of their estate and still keep a steady hand on the wheel while younger beneficiaries mature.
Trusts still help separate legal ownership from beneficial rights, which gives strong control and protection. But tighter rules since 2006 have made large gifts into trusts more expensive in some cases.
When these structures are typically used
Typical use cases include parents or grandparents with share portfolios, spare cash, or buy-to-let property who prefer planning succession before probate.
Often the debate narrows because both routes split control from benefit. They differ in mechanics: company structures can keep growth inside a corporate wrapper, while trusts focus on who can benefit and when.
| Goal | Common use | Control tool | Practical note |
|---|---|---|---|
| Reduce estate exposure | Long-term capital growth | Share classes or trustee powers | Needs clear governance and paperwork |
| Protect assets | Separation of ownership | Legal vs beneficial split | Trust charges may apply on large gifts |
| Shape succession | Gradual gifting to next generation | Directors or trustees | Professional advice changes outcomes |
We will explain the technical differences next, but bear in mind that small details — who controls distributions, who holds votes, and how loans are treated — can change tax outcomes. Professional advice matters.
What is a Family Investment Company and how does it work?
Practically speaking, a family investment company is an ordinary private limited company used to hold assets. There is no special legal definition or bespoke rules for these structures. They are a plain corporate wrapper for long‑term planning.
Who runs the day‑to‑day
Directors manage the firm’s daily decisions. Founders often remain directors so they steer strategy and cash flow. Shareholders own equity, with rights set out in the articles.
How control and value are split
Different share classes separate voting power from economic benefit. That lets founders keep control while younger generations receive dividend rights or growth shares that capture future capital growth.
Typical assets held
Common holdings include cash, listed shares, collective funds and investment property rather than trading stock. Proper governance documents — articles and a shareholders’ agreement — set the rules for transfers and dividends.
| Role | Common asset | Purpose |
|---|---|---|
| Directors | Cash portfolio | Run investments |
| Shareholders | Listed shares | Receive dividends |
| Governance | Property | Protect capital |
What is a trust in UK estate planning and what does a discretionary trust do?
We explain this plainly: a trust transfers legal ownership of assets to trustees. The trustees must then hold and manage those assets to benefit named people.
Who does what — settlor, trustees and beneficiaries
The settlor creates the arrangement and moves assets into it. Trustees hold legal title and run investments. Beneficiaries are those who may receive income or capital under the rules.
How control is written down
The trust deed sets powers, duties and limits. Many families add a non-binding letter of wishes to guide trustees about priorities and timing.
Why discretionary trusts remain common
“Discretionary” means trustees decide who gets what, when, and how much within the deed. That brings practical flexibility and protection.
- They can protect assets from creditors or relationship breakdown.
- They can include unborn or unascertained beneficiaries and run long term — often up to 125 years.
- They let families keep influence through trustee appointments and clear governance.
We will compare the costs and tax consequences next, since these structures carry their own charges and reporting duties.
Using a family investment company vs trust for inheritance tax uk: the key IHT differences
When you set up either structure, the moment of transfer often defines the resulting IHT outcome.
IHT on creation
Gifts into a FIC generally qualify as potentially exempt transfers (PETs). That means no immediate lifetime charge if the donor survives seven years.
By contrast, most gifts into discretionary trusts are treated as chargeable lifetime transfers (CLTs) after 2006. If the transfer exceeds the nil‑rate band, a 20% lifetime charge can apply.
The nil‑rate band issue
Settling more than the current nil‑rate band into a discretionary trust can trigger that 20% upfront levy. Large transfers often need staging or reliefs to avoid the charge.
The seven‑year rule
A PET that survives seven years can fall outside the estate for IHT. This makes staged gifting into shareholdings an effective route for gradual estate reduction.
Ongoing charges on discretionary arrangements
Discretionary trusts face ten‑yearly periodic charges (up to about 6%) and proportionate exit charges when capital leaves. These can erode value over the long term.
Why FICs usually avoid periodic IHT charges
A corporate wrapper does not attract the periodic trust regime. That is a key practical advantage.
However, beware: founders’ loans remain in the founder’s estate unless formally gifted away. Loan balances can undo much of the hoped‑for estate reduction.
Simple example
Parents fund a FIC with a loan, issue growth shares to children, then draw repayments later for retirement. The shares can leave value out of the estate, but the loan still sits with the founders unless restructured.
- Takeaway: PETs let you “wait and see” if you survive seven years. CLTs can trigger immediate charges above the nil‑rate band.
- Practical tip: staging transfers, careful loan treatment and professional advice shape real outcomes.
Ongoing tax on income and gains: corporation tax vs trust tax rates
How profit and gain are taxed matters more than headline estate charges when you aim to grow wealth.
Corporation tax and long‑term accumulation
Profits within a corporate wrapper are subject to corporation tax. At recent rates this can be lower than high personal rates, so retained profits can compound inside the vehicle with less annual drag.
Trust income tax rates
Trusts face higher income tax rates on interest and rental income and steep rates on dividend income. That higher levy reduces net cash available to reinvest and increases long‑term friction.
Capital gains and dividend extraction
Capital gains realised inside a trust can face greater effective friction than gains held inside a company. In a company, gains sit after corporation tax, then may be paid out as dividends.
This creates potential double taxation: tax at the corporate level, then personal tax when profit is drawn. If shareholders delay extraction, gross roll‑up of dividend income may help long‑term compounding, subject to anti‑avoidance rules.
- Practical point: choose structures to match goals — income now, growth later or a blend.
- Takeaway: ongoing tax drag can be as decisive as any charge on death.
Control, flexibility and who can benefit: shareholders vs beneficiaries
Control over who decides and who benefits can shape outcomes more than tax rules. We separate governance from economic rights. That makes practical choices clearer.
Day‑to‑day control means who chooses investments, who signs off distributions, and who can change the plan later. In a FIC founders often keep voting shares and stay as directors. Other relatives hold shares with income or growth rights. This keeps decision power with the founders while shifting value outward.
Keeping voting rights while passing economic value
Different share classes split votes from payments. Parents can hold ordinary voting shares while issuing non‑voting growth shares to children. That lets shareholders receive dividends or capital rise without losing direction of the business or portfolio.
Trustees’ powers and managing distributions
With a discretionary trust trustees decide who gets what and when. The trust deed and a letter of wishes guide their choices. This gives flexibility and protection, especially when beneficiaries need safeguarding from risks such as separation or creditor claims.
Who can benefit now and in future
Trusts can include unborn or unascertained beneficiaries and can run long term. A company usually pays only shareholders, which limits reach. Many families solve this by letting a discretionary trust hold shares. That widens the beneficiary pool while keeping corporate governance intact.
| Aspect | FIC | Discretionary trust |
|---|---|---|
| Control | Directors and voting shareholders | Trustees with powers set in deed |
| Who can benefit | Shareholders only (unless shares held by trust) | Named, unborn or unascertained beneficiaries |
| Flexibility | High on governance, limited on beneficiary scope | High on beneficiary selection, discretionary payouts |
How each structure is funded and how money can come back to the founders
Funding routes shape control, future access to cash, and estate exposure.
Two clear options are common. Founders either subscribe for shares (equity) or lend money as a director/shareholder loan. Each route changes who has voting power and who can take cash out later.
- Subscribing for shares moves capital out of personal balance sheets and gives beneficiaries an equity stake. This can reduce estate exposure over time.
- Lending keeps access to funds. Repayments are normally treated as a return of capital and not income if no interest is charged, so they are often tax‑efficient.
- However, loan balances remain part of the founder’s estate unless formally gifted or waived, so large outstanding sums can defeat IHT planning.
- Assets placed into a discretionary arrangement generally cannot be repaid to the settlor, so trusts offer certainty but less personal access.
Simple example: parents loan cash to a fic which buys a portfolio while children hold growth shares for future uplift. These choices may trigger other charges, such as CGT on transfers, so we advise professional review and careful planning. See our detailed guidance on FICs and trusts.
Setup costs, administration and privacy: what families often overlook
Hidden fees and admin often decide which structure proves practical over decades.
Professional set-up for a fic usually needs multi‑disciplinary advice. Private wealth solicitors, corporate lawyers and specialist accountants will draft articles, share classes and a shareholders’ agreement. That adds to upfront cost.
Running ongoing accounts brings regular work. Expect bookkeeping, annual accounts, corporation returns and board minutes. Poor record‑keeping risks unintended charges or disputes.
Reporting and visibility
Companies must file information at Companies House. That makes some details public.
Trusts are more private, though many must register with HMRC’s Trust Registration Service (TRS). Privacy has reduced, so confidentiality is not guaranteed.
Winding up and life changes
Trusts can often be wound up more simply than companies. A trust deed may allow distribution and closure without formal liquidation.
Companies may need strike off, solvent liquidation or tax clearance. That process takes time and cost.
- Takeaway: the best tax outcome on paper can be undone by high running costs.
- Practical tip: choose the option that your advisers and trustees or directors can realistically manage long term.
When a trust is the better option and when a FIC tends to win
Often the clearest decisions come when we match the size of the pot to the level of control needed.
When trusts fit best: small sums, assets that already carry reliefs, and situations where protection or quick access matters most. Discretionary arrangements work well when beneficiaries may need help soon or when shielding from creditors is the priority.
Practical points: trusts often keep capital outside estates quickly. But they also face higher rates, periodic charges and reporting duties. That means they are no guaranteed route to lower IHT.
When a FIC tends to win
For larger capital sums and long horizons a corporate wrapper often offers better compounding and lower ongoing drag. Founders keep control while growth sits outside personal estates.
Holding property inside such a vehicle can change income treatment and how gains arise on sale. That can suit landlords with sizeable portfolios who plan to hold long term.
Risk and reality check
Don’t assume that an arrangement equals tax saving. Higher trust rates and ten‑year charges can erode benefits.
“Good planning matches structure to sums, timescale and who needs access.”
We recommend a short review before choosing. If you want practical guidance, see our piece on trusts and IHT. That helps match goals to the right route without rushing into a fashionable option.
Combining a FIC and a trust for stronger family wealth planning
Pairing a corporate wrapper with a discretionary arrangement is often the clearest route to workable succession. It lets families retain governance while widening who may benefit across generations.
How a discretionary trust can hold FIC shares
In plain terms, the trust holds growth shares issued by the FIC. That widens the beneficiary pool beyond direct shareholders.
Practical effect: grandchildren or future descendants can be included without handing shares to individuals today. The trust trustees decide distributions within the deed.
Designing share rights and governance
Articles and a shareholders’ agreement set the rules. Different share classes separate voting, dividends and capital growth.
Founders often keep voting shares and act as directors. The trust holds growth shares that capture long-term uplift. This keeps control with founders while value sits outside personal estates.
- Decide which shares carry dividend income and which capture capital growth.
- Set clear transfer restrictions and pre-emption rights in writing.
- Write rules for death, divorce and departures to reduce disputes.
| Feature | Typical approach | Benefit |
|---|---|---|
| Voting rights | Retained by founders | Steady governance and strategic direction |
| Dividend policy | Flexible — reinvest or distribute | Balance short-term income needs with long-term growth |
| Growth shares | Held by trust | Wider beneficiary reach and succession planning |
| Trustee powers | Discretionary payouts | Protection across generations |
Clear governance reduces conflict. Written procedures on decision-making, distributions and share transfers help protect capital and keep the plan practical.
For practical steps on securing property within a trust and company model see our guide on securing investment property in a trust.
Conclusion
Conclusion
Ultimately, the right route depends on goals, timelines and who you want to protect. For significant sums held over many years, a fic or grouping of fics often compares favourably on long‑term estate efficiency. That is not an automatic win for every household.
Trusts still shine when asset protection, discretionary payouts and planning for unborn members matter. They offer flexibility other models cannot match, though they can create upfront and ongoing charges.
We recommend a joined‑up review with legal, tax and investment advisers to map objectives, costs and governance before choosing or combining structures.