Trust Vs FIC – A Growing Dilemma for Wealthy UK Families

If you have built significant wealth in the UK, protecting it, growing it, and passing it on to the next generation without a 40% inheritance tax bill is likely one of your most pressing financial concerns.

For decades, discretionary trusts were the go-to structure for high net worth families looking to manage their estates. In recent years, however, family investment companies (FICs) have emerged as a compelling alternative and, increasingly, as the preferred choice for those with substantial assets.

So how do you choose between the two? This article provides a clear, accurate comparison of trusts and FICs, covering how each works, their tax treatment under current HMRC rules, the pros and cons of each, and which structure tends to suit which type of family.

What Is a Discretionary Trust?

A discretionary trust is a legal arrangement in which a settlor transfers assets to trustees, who hold and manage those assets for the benefit of named beneficiaries. The trustees have discretion over how and when income or capital is distributed.

No individual beneficiary has an automatic right to the assets, which gives the structure genuine flexibility. A parent, for example, can place investments into a trust and allow the trustees to distribute income to children or grandchildren based on their needs at the time.

Key Tax Features of Discretionary Trusts

• IHT on entry: Any amount transferred into a discretionary trust above the available nil-rate band (currently £325,000 per individual, frozen until April 2031) is subject to an immediate lifetime inheritance tax charge of 20%. If the settlor dies within seven years, the rate can increase to 40%, with credit given for the 20% already paid.
• Periodic charge: Every ten years, the trust fund is assessed for IHT. A charge of up to 6% applies on the value above the nil-rate band.
• Exit charge: When capital leaves the trust between ten-year anniversaries, a proportionate exit charge of up to 6% may apply.
• Capital gains tax: The annual CGT exempt amount for trusts is £1,500 for 2025/26. Gains above this are taxed at 24%, which applies to all chargeable assets including residential property.
• Income tax: Discretionary trustees pay income tax on trust income at the trust rate of 45% on non-dividend income and 39.35% on dividend income. When income is distributed to beneficiaries, those beneficiaries may reclaim tax already paid by the trustees if they pay tax at a lower personal rate.

What Is a Family Investment Company (FIC)?

A family investment company is a UK private limited company set up specifically to hold and grow family assets, typically investment portfolios, cash, or property. Rather than holding assets personally or in trust, the family owns them through a company structure.

Parents typically act as directors and hold voting shares, retaining control over all decisions. Children or other family members hold separate share classes that carry rights to dividends and capital growth, without any voting control. This allows economic value to pass to the next generation while the founding generation retains full operational control.

Key Tax Features of FICs

• Corporation tax: FICs are commonly regarded by HMRC as a Close Investment Holding Company (CIHC). A CIHC pays corporation tax at the main rate of 25% on all profits, regardless of profit size. The small profits rate of 19% and marginal relief do not apply to CIHCs.
• Dividends received: Dividends received by the FIC from UK companies are generally exempt from corporation tax, which can make reinvesting income inside the structure highly efficient.
• Dividends paid out: When dividends are paid from the FIC to shareholders, they are taxable in the hands of the shareholder. For 2025/26, basic rate taxpayers pay 8.75%, higher rate taxpayers pay 33.75%, and additional rate taxpayers pay 39.35% on dividends above the £500 annual dividend allowance. From April 2026, the basic rate rises to 10.75% and the higher rate rises to 35.75%, while the additional rate remains at 39.35%.
• Capital gains: When the FIC disposes of an asset, any gain is subject to corporation tax, not personal capital gains tax. This can be more favourable than the current personal CGT rates of 18% (lower rate) and 24% (higher rate), which apply to individuals from 30 October 2024.
• IHT on setup: A FIC can be established without triggering an immediate lifetime IHT charge, provided the funding is structured correctly. Where a founder lends money to the FIC rather than gifting it, the loan remains part of the founder’s estate but the growth on invested assets accumulates within the company and outside the founder’s estate.

Trust vs FIC: A Side-by-Side Comparison

IHT Planning: Where the Two Structures Differ Most

This is where the distinction between trusts and FICs becomes most significant for estate planning purposes.

Trusts and the Nil-Rate Band Constraint

When a settlor places assets into a discretionary trust, any amount above their available nil-rate band (£325,000 in 2025/26) is immediately subject to inheritance tax at 20%. Married couples and civil partners can each make use of their own nil-rate bands, but once those are used, additional assets transferred to a trust carry an immediate tax cost.

The nil-rate band has been frozen at £325,000 since April 2009. Following the November 2025 Budget, Chancellor Rachel Reeves confirmed it will remain frozen until April 2031, extending a previous freeze that had been set to end in April 2030. The residence nil-rate band (for passing a main home to direct descendants) also remains frozen at £175,000 until April 2031.

This means a family wishing to shelter assets significantly above their available nil-rate band within a discretionary trust will face an immediate lifetime tax charge on any excess amount.

FICs and the IHT Advantage on Setup

A FIC can be capitalised by way of a loan from the founder, rather than a gift. The loan is repayable to the founder and remains within their estate, but the growth on the invested assets accumulates within the company and outside the founder’s personal estate. Shares issued to children from the outset capture that future growth, potentially outside the founder’s estate if they are structured as potentially exempt transfers and the donor survives seven years.

FICs are not subject to ten-year periodic charges or exit charges. This is a notable structural advantage over a discretionary trust for long-term wealth accumulation.

It is important to note that any outstanding loans from the founder to the FIC remain within the founder’s estate for IHT purposes until they are repaid or formally gifted. The loan itself provides no immediate IHT relief unless it is given away.

Control and Succession Planning

Both structures offer meaningful control to the founding generation, but they do so differently.

In a trust, control rests with the trustees. If the settlor is also a trustee, they retain influence, but they are legally bound to act in the interests of the beneficiaries and to follow the trust deed. Depending on how the deed is drafted, this can limit flexibility over time.

In a FIC, control is exercised through the articles of association and the director structure. Founders who hold voting shares can continue making every significant decision about how assets are managed, invested, and distributed. Children who hold non-voting economic shares participate in the wealth without the ability to override decisions made by the founding generation. For families accustomed to running businesses, this structure often feels familiar and practical.

Property Investors: Why FICs Are Often Preferred

For families with significant property portfolios, FICs have a practical advantage that is often overlooked: mortgage access.

Very few lenders are willing to extend buy-to-let mortgages to discretionary trusts, and those that do typically charge substantially higher rates. By contrast, FICs, as limited companies, have access to a broader range of buy-to-let mortgage products at more competitive rates. This alone can make a FIC the more sensible vehicle for property-holding families, independent of the tax considerations.

It is important to note that transferring existing personally-held property into a FIC may trigger capital gains tax and stamp duty land tax. This is a decision that requires careful financial modelling before any action is taken.

HMRC Scrutiny: What You Need to Know

HMRC established a specialist team in 2019 to examine whether FICs were being used for tax avoidance. After investigation, no systemic abuse was identified and the team was disbanded in 2021. FICs remain legal and recognised structures under UK law.

That said, HMRC continues to monitor FICs under standard compliance procedures. Particular areas of attention include:

• The settlements legislation, which can apply if income is considered to have been artificially diverted to family members who pay tax at lower rates.
• The treatment of loans from founders, where the interest-free nature of some arrangements has attracted HMRC challenge.
• Share valuations when shares are transferred to family members, which must be properly documented, particularly for minority holdings.

Both trusts and FICs must be properly established and administered. Neither structure should be viewed as a shortcut. Professional legal and tax advice is essential before implementing either.

Real-World Scenarios: Which Structure Fits Which Family?

Scenario 1: A Family With a Large Property Portfolio

David and Sarah own £3 million in buy-to-let properties. They want to pass the portfolio to their three adult children while retaining control and keeping mortgage finance available.

A FIC is likely the better fit. It provides better mortgage access, allows them to remain directors, and means the growth in property value accrues to the children’s shares rather than their own estate. There is no immediate IHT charge if the company is funded by a loan, and there are no ten-year periodic charges.

Scenario 2: A Family Requiring Flexibility and Asset Protection

A family with younger beneficiaries, or beneficiaries whose circumstances are uncertain, may find a discretionary trust more appropriate. The trust structure allows trustees to withhold distributions entirely or redirect them as circumstances change. A trust also makes it significantly harder for a beneficiary’s creditors or a divorcing spouse to claim assets, since no beneficiary has a fixed entitlement.

Scenario 3: A Business Owner Nearing Retirement

An entrepreneur more comfortable with company structures, filing accounts, and operating through a board of directors may find the FIC environment intuitive. Many business owners have noted that a FIC operates similarly to the company structures they already understand, which can ease the transition into a more structured long-term estate planning approach.

Pros and Cons at a Glance

Discretionary Trust

Advantages:

• Flexible distribution of assets to beneficiaries at trustee discretion
• Strong asset protection from creditors and divorce
• Well-suited for families with younger or vulnerable beneficiaries
• Well-established legal framework with a long track record in the UK
• Useful for controlling how and when wealth is received by the next generation

Disadvantages:

• 20% lifetime IHT charge on amounts above the nil-rate band at entry
• Ten-year periodic charge of up to 6% and proportionate exit charges
• Very limited mortgage access for property assets
• Income taxed at high trust rates (45% / 39.35%) unless distributed to beneficiaries

Family Investment Company

Advantages:

• No immediate IHT charge when funded by a loan from the founder
• No ten-year periodic charges or exit charges
• Founder retains full control as director and voting shareholder
• Corporation tax at 25% can be lower than higher or additional personal income tax rates on income
• Better mortgage access for property portfolios
• Future capital growth accrues to children’s shares and sits outside the founder’s estate

Disadvantages:

• Most FICs are classified as CIHCs by HMRC; the small profits rate of 19% does not apply
• Double taxation applies when profits are extracted via dividends (corporation tax then dividend tax)
• Annual accounts filed at Companies House reduce privacy compared to a trust
• Higher setup and ongoing administration costs
• Generally not cost-effective for smaller estates

Can You Use Both a Trust and a FIC?

Yes. Trusts and FICs are not mutually exclusive and can be used together as part of a broader wealth planning strategy. A family trust might hold shares in a FIC, allowing the trust to participate in the growth of the company while also providing the asset protection and succession flexibility that a trust structure offers.

This combination can suit particularly complex family arrangements but adds a further layer of legal and administrative complexity. It must be carefully structured with professional advice.

Frequently Asked Questions

What is a Family Investment Company (FIC) in the UK?

A FIC is a UK private limited company used by families to hold and grow investments. Parents typically act as directors and hold voting shares, while children hold non-voting shares that carry rights to dividends and capital growth. It is used as a tax-efficient structure for long-term wealth preservation and succession planning.

Is a trust or a FIC better for inheritance tax planning in the UK?

It depends on the size of the estate and the family’s goals. FICs can be set up without an immediate IHT charge when funded by a loan, and they have no ten-year periodic charges. Discretionary trusts are subject to a 20% charge on amounts above the nil-rate band at entry, plus periodic and exit charges. However, trusts offer stronger asset protection and are more appropriate where beneficiary flexibility is a priority.

Do FICs avoid inheritance tax?

A FIC does not eliminate inheritance tax, but it can help reduce an estate’s IHT exposure over time. Shares gifted to children may fall outside the founder’s estate if the donor survives seven years, as they are treated as potentially exempt transfers. Outstanding loans to the FIC remain within the estate until repaid or gifted away. Proper legal and tax advice is essential.

Are family investment companies legal in the UK?

Yes. FICs are legal structures under UK company law. HMRC investigated their use in 2019 and found no systemic abuse. The specialist HMRC team was disbanded in 2021, and FICs continue to be monitored under standard compliance procedures. They must be properly structured and administered to remain compliant.

What are the ten-year periodic charges on a discretionary trust?

Every ten years, HMRC assesses the value of the trust fund. If the value exceeds the available nil-rate band (£325,000 in 2025/26), a charge of up to 6% applies to the excess. Proportionate exit charges also apply when assets leave the trust between anniversary dates.

Can a family investment company hold property?

Yes. A FIC can hold investment property. This can be advantageous because FICs generally have better access to buy-to-let mortgage products than discretionary trusts. However, transferring existing personally-held property into a FIC may trigger capital gains tax and stamp duty land tax, so professional advice is essential before any transfer takes place.

At what wealth level does a FIC make sense?

A FIC involves meaningful legal, accounting, and ongoing administrative costs. Most advisers consider a FIC appropriate for families with investable assets above £500,000 to £1 million. Below this level, the ongoing compliance costs may outweigh the tax benefits.

What is the nil-rate band and how long is it frozen?

The standard inheritance tax nil-rate band is £325,000 per individual. It has not changed since April 2009. Following the November 2025 Budget, Chancellor Rachel Reeves confirmed it will remain frozen at this level until April 2031. The residence nil-rate band (£175,000) is also frozen until April 2031.

Conclusion: What Do High Net Worth Families Actually Choose?

There is no single answer that works for every family, but a clear pattern has emerged in UK wealth planning.

Discretionary trusts tend to suit families with younger or more vulnerable beneficiaries, estates where asset protection is the primary concern, or situations where the assets involved are modest in size relative to the nil-rate band. They remain a well-established and legally sound vehicle with a long track record.

FICs tend to be preferred by high net worth families with substantial assets, particularly property investors, business owners, and those who want to accumulate wealth over the long term without periodic IHT charges. The ability to retain full control through a directorship, pass economic value to children without giving up voting rights, and access the company’s loan account if needed makes the FIC a flexible and increasingly popular choice.

For many families, the answer is not either/or. A well-structured estate plan may incorporate both structures, using each where it performs best.

What matters most is that any structure is established on solid legal and accounting foundations, properly administered, and reviewed regularly as tax laws continue to evolve. The UK tax landscape around IHT thresholds, pension inclusion in estates (from April 2027), business property relief, and dividend taxation has shifted significantly in recent years, and structures built today must be capable of adapting.

The information in this article reflects UK tax rules and HMRC guidance current as of the 2025/26 tax year, with reference to confirmed changes taking effect from April 2026 and beyond. It is intended for general guidance only and does not constitute legal or financial advice. Always seek professional advice tailored to your individual circumstances before implementing any estate planning structure.