Written by Tom Wainman, Partner, Tax, Trusts and Estates

Estate and tax planning is most successful when based on the individual circumstances and goals of each family, with specialist legal and financial advice. 

Family Investment Companies (FICs) and trusts can both assist the efficient distribution of family wealth in an estate plan. The use of these structures can reduce inheritance tax and potentially provide:

  • A structure suited to individual needs and wishes
  • Flexibility and control over how and when family members benefit from the estate
  • Control over everyday management, including how the wealth is invested
  • Greater asset protection in the event of divorce.

The planning strategy will consider factual matters, such as the wealth and assets of the client and/or their family, as well as the client’s preferences for the management and protection of wealth.

How do trusts and FICs compare in the following areas?

Control

  • With trusts, the trustees legally own the assets, making decisions over their management and distribution for the benefit of the beneficiaries
  • With a FIC, written specification and a Shareholders’ Agreement is needed to achieve control for the founder.

Tax

  • There is 19% corporation tax on FIC profits and potential 0% tax on dividends (although corporation tax will increase to 25% from 1st April 2023)
  • This is favourable to a discretionary trust, with tax rates of 45% on non-dividend income, 38.1% on dividends (on income over the standard threshold) and 20% on capital gains
  • A trust will also be subject to ten-yearly charges and exit charges for inheritance tax purposes. However, no inheritance tax is due on the death of a beneficiary
  • A FIC is therefore at an advantage when considering tax, especially with longer term wealth accumulation.

Value and type of assets

  • Wealth can be passed down via a FIC without immediate inheritance tax charges, unlike assets in a trust; with an immediate IHT charge at a rate of 20% if the value is over £325,000 (subject to exemptions and relief). For that reason, a FIC is more commonly used for higher value estate planning.
  • Where assets qualify for an inheritance tax relief (business or agricultural), this allows assets to be settled into trust without immediate inheritance tax charge.

Asset protection

  • A FIC will potentially provide greater asset protection than a trust
  • A FIC can include controls over what happens on the divorce of children who are shareholders in the FIC. For example, a shareholders’ agreement can be put in place to regulate the buyback or transfer of those shares in such an event
  • A FIC will also typically restrict who can hold shares, direct family members only, for example
  • Ideally, pre-nuptial or post-nuptial agreements would be put in place alongside the FIC or a trust
  • A discretionary trust also offers an element of asset protection; no beneficiary will have automatic entitlement to income and/or capital. The trustees can manage how each beneficiary benefits from income and capital. That said, the family courts have broad powers in relation to the trust, and could interpret the trust as a financial resource or a nuptial settlement.

Set up, compliance and privacy

  • It will typically cost more in professional fees to set up a FIC than a trust.
  • Requirements for trusts have increased over recent years, but these costs are broadly similar to FIC administrative costs.
  • FICs may not be as private as trust structures because of legal reporting requirements and the requirement to register “persons with significant control”. Requirements for FICs set up as unlimited companies are lesser, to an extent.

Both trusts and FICs are structures that should be considered in an estate planning strategy. They can even be used together, where trusts hold shares in a FIC for the longer term benefit of children and unborn family members.