Family Investment Company vs trust - which is better

For business owners and high net worth individuals, protecting your family wealth and assets is a key consideration when succession planning.

Family Investment Companies (FICs) and trusts both have benefits and drawbacks that must be considered when deciding which is better for your family and personal circumstances. It’s imperative you seek professional advice before deciding which route is right for you.

In this blog we will look at the difference between FICs and trusts, the advantages and disadvantages of both and the tax efficiency of each option.

What is a family investment company?

A family investment company (FIC) is a company that is used for investment purposes. A Family Investment Company is a UK private limited company whose shareholders are generally made up of family members. Typically, they are set up to protect assets and transfer wealth to future generations.

A FIC is a normal limited liability company that’s incorporated and limited by shares, but it invests rather than trades. Examples of the types of investments a FIC can include are cash, equity portfolios or property.

A Family Investment company is a private limited company set up by the founders, who then transfer cash or assets, usually by way of a loan into the FIC or by using incorporation reliefs.

Family Investment Companies FICs are often used as an alternative to traditional trust arrangements.

There is no legal definition of an FIC, and FICs are not subject to special rules of their own.

What’s the difference between a family investment company and a trust?

Family Investment Companies (FICs) can operate in a similar way to a trust. Trusts are often less tax efficient and less flexible than a Family Investment Company.

Family Investment Companies transfer assets and allow wealth to be passed on and inherited in the form of shares within a company. This means that the directors and shareholders can continue to hold shares, retain some control and reap the benefit from the assets and potential profits.

Trusts however allow assets to be settled for the benefit of the beneficiaries. This normally excludes the settlor of the trust benefitting from those assets. If you do benefit from the assets in a trust, then they will still be treated as forming part of your estate and therefore subject to inheritance tax.

Both an FIC and a trust have tax implications and need to be carefully set up and planned with advice sought from a tax professional such as dns accountants to understand the tax treatment of both options and to avoid the possibility of triggering unnecessary tax charges.

With a family investment company, you, the donor will be a director and retain a controlling interest in the FIC. This allows you to continue to control assets and funds etc., giving you more ongoing control than a trust would and allowing you to continue to benefit from the FIC.

A trust on the other hand is controlled by trustees, who are responsible for controlling the money and assets held within a trust. A trustee can be the settlor, so you can still retain some element of control but you as the settlor of the trust cannot benefit from the trust.

Advantages Family Investment Companies

A Family Investment Company can create significant tax savings and provide more control and flexibility to business owners. This is because profits that occur in a Family Investment Company are taxed at corporation tax rates rather than taxed as personal income or capital gains and some control can be retained and benefit gained from the FIC.

Just some of the benefits of family investment companies are:

• Reduced corporation tax liability: Profits from the investments are subject to a potentially lower tax rate rather than higher rate income tax.
• Asset protection & wealth management: Individuals can separate their personal and business assets. This can protect personal wealth from potential risks such as legal action etc.
• Preservation of wealth: for next generations.
• Control and flexibility: Although you will be transferring assets, you can keep control over the assets in the company by being named as a director and preferential shareholder. Retaining control gives flexibility over how the income and capital rights are structured and provide more control and flexibility than a trust.
• Inheritance Tax savings: For IHT purposes, assets held in an FIC are not subject to IHT until they are distributed to beneficiaries.
• Full tax relief: for interest paid on residential mortgages.

Disadvantages of Family Investment Companies

• Tax implications & tax position: If putting property into an FIC, this may trigger a CGT charge and a Stamp Duty Land Tax charge.
• Increased costs: Set up costs and ongoing administration costs for company tax returns and accounts for the FIC can make it a more expensive option.
• Not suitable for all families: A FIC may not be the correct structure if all the profits are extracted.
• Family conflicts: Members of the family may disagree on how the company is managed in the future. This has to be carefully considered and managed.

Tax advantages of a Family Investment Company

Corporation tax

Profits arising within in the FIC are chargeable to corporation tax rates (these are currently 19% to 25% in 2024/25). This is significantly lower than the top rates of income tax if profits are extracted (the top rate is currently 45%) and therefore may result in higher post-tax profits being available for reinvestment.

There is potential to increase the return on the investment significantly where the FIC holds an equity portfolio because there may be no tax at all as dividend payments are often tax free from company to company.

Some individuals use FICs to house their residential property portfolios as the rental profits in the company are taxed at corporate rates and companies can deduct any loan interest from the rental income which is now restricted for personal investors to basic rate.

Capital Gains Tax (CGT)

Appropriate tax planning from professional tax advisors such as dns accountants can prevent any CGT on setting up the FIC.

Any gains on assets sold within the company would be charged at corporation tax rates rather than personal CGT rates.

Where the asset disposed of is shares in a subsidiary company, Substantial Shareholdings Exemption may be available to exempt the gain. Detailed conditions apply, but broadly the FIC would need to hold at least 10% of the company being disposed of, which would itself need to be a trading company.

Before setting up a FIC, we would calculate if CGT were likely to be triggered on the transfer of assets into the FIC, if it is then we’d potentially advise against a FIC.

Income tax and dividend tax

A FIC shelters the investments from personal tax until the funds are extracted from the company. When profits are extracted, the shareholders will be liable to personal tax on any amounts received (subject to income tax thresholds).

Shareholders are usually remunerated by way of dividends paid out and the tax payable on the dividend income received will be subject to the current tax rates for dividends (which can be lower than income tax rates).

Founder shareholders often pay themselves in dividend income as their income levels can be high. This is because the combined tax rate of the company and the income tax would be higher than if the asset were held directly.

For children over the age of 18, payment of a dividend up to the basic rate band can be a very efficient way of extracting funds from a company and can often be used to provide income during further education/university periods.

The maximum tax benefit can be utilised when the capital and income is retained within the company for long periods and passes wealth onto the next generation.

Inheritance tax

Inheritance tax benefits are often one of the key motivations for setting up a FIC. The reason for this is that a gift of shares to children could be a tax-exempt transfer for IHT, meaning the value of the gift would fall out of the founder’s estate for IHT purposes, provided they survived the gift by at least seven years.

Tax relief on interest

A corporation tax deduction for interest can be claimed on loans taken out against the value of its investments, where the loans are used for the purposes of the company’s business. Individuals are not eligible to claim tax relief on interest on loans to acquire a portfolio of shares.

Note: Loan interest deductions may be restricted where the total interest payable exceeds £2 million per annum on a group basis.

What is a trust?

A trust is a way of managing assets (investments, money, land or buildings). There are different types of trusts that offer different rules and benefits.

Trusts involve:

• the ‘settlor’ - the person who puts assets into a trust
• the ‘trustee’ - the person who manages the trust
• the ‘beneficiary’ - the person who benefits from the trust

What are the types of trusts?

Types of trusts include:

• Discretionary trust: With discretionary trusts, trustees make some decisions on how trust income can be utilised. They can also impose certain conditions around the trust such as how often payments can be made.
• Bare trust: The beneficiary can access the assets after they reach 18 years old.
• Interest in possession trust: Trustees are required to pay all trust income as it arises to the beneficiary, excluding any expenses.
• Accumulation trust: The trustees accumulate all trust income, add it to the capital and pay it to the beneficiary.
• Mixed trust: This is a combination of two or more types of trusts.
• Settlor-interested trust: The settlor, their spouse, or a civil partner is a trust beneficiary.

Why should I set up a trust?

Many people think that trusts are outdated and that only high net worth individuals use them as a way of passing on wealth, protecting their assets from the tax man. However, trusts can be useful to all types of people as a way of protecting and passing on assets and succession planning to benefit future generations. Here are some of the reasons that you may consider setting up at trust.

• To avoid potential family disputes.
• To hold assets for someone too young to handle their own affairs.
• To hold assets for someone that is incapacitated or cannot handle their own affairs.
• To pass on assets while you are still alive in a tax efficient manner.
• To benefit from tax advantages and minimise IHT charges.
• To offer more future flexibility.
• Asset protection.

What does a trust settlor do?

The settlor decides how the assets in a trust should be used. This is documented in the ‘trust deed’.

Settlors can also benefit from the trust assets - this is called a ‘settlor-interested’ trust and has special tax rules.

What do trustees do?

The trustees are the legal owners of assets held in a trust. Their role entails:

• dealing with the assets according to the settlor’s wishes, as set out in the trust deed or their will
• managing the trust on a day-to-day basis and paying any tax due
• deciding how to invest or use the trust’s assets

There has to be at least one trustee, but trustees can change.

What are beneficiaries to a trust?

Trust beneficiaries may benefit from:

• the income of a trust only, for example from renting out a house held in a trust
• the capital only, for example getting shares held in a trust when they reach a certain age
• both the income and capital of the trust

Beneficiaries can be one individual, a whole family or defined group of people.

Advantages of a trust

There can be many advantages to a trust, but you need to choose the right type of trust and you should seek professional help to advise on the best one for you and to set up of the trust on your behalf.

Here are just some of the advantages:

• Provide flexibility and control when gifting assets.
• Protect the interests of the settlor.
• Lessen the chance of being challenged if disputed after death.
• The value of the asset (a property for example) may not be counted towards IHT.
• Can help to avoid probate.
• Asset protection.
• Tax efficient benefits.
• Protection for younger or vulnerable family members.

Disadvantages of a trust

As with most things, there are also some disadvantages to consider, these may be:

• Trustees have added responsibility and duties.
• Trustees need time to manage the trust including paying tax on income earned by the assets held.
• Trustees do not qualify for the dividend allowance.
• Different types of trust income have different rates of Income Tax.

Tax on trusts

Income tax

Most trusts do not pay Income Tax on income up to a tax-free amount (normally £500). Tax is due on the full amount if the income is more than the tax-free amount.

Find out more about income tax on trusts here.

Capital Gains Tax (CGT)

Capital Gains Tax is a tax on the profit (‘gain’) when something (an ‘asset’) has increased in value is taken out of or put into a trust.

If assets are put into a trust, tax is paid by either the person selling the asset to the trust or the settlor transferring the asset.

If assets are taken out of a trust

The trustees usually have to pay Capital Gains Tax when they sell or transfer assets on behalf of the beneficiary.

There’s no tax to pay in bare trusts if the assets are transferred to the beneficiary.

If an asset is transferred to someone else sometimes Capital Gains Tax may not payable. This happens when someone dies and an ‘interest in possession’ ends.

Find out more about Capital Gains Tax and trust here.

Inheritance Tax (IHT)

IHT is generally due when:

• assets are transferred into a trust
• a trust reaches a 10-year anniversary of being set up (there are ten yearly IHT charges)
• assets are transferred out of a trust or the trust ends
• someone dies and a trust is involved when sorting out their estate

There are special tax rules for different types of trust. Find out more here.

Summary

If you are considering your succession planning, wealth management and passing on assets to the younger generation, then you should consider both FIC’s and trusts.

Trusts are beneficial for their flexibility because they can be tailored to suit specific needs and objectives of a family. By transferring assets to a trust, a family can take advantage of tax-efficient wealth transfer and succession planning, as well as asset protection.

Family investment companies have similar benefits to a trust, plus some additional tax benefits that trusts do not have. They help you to manage family investments, reduce tax and retain control where needed.

Overall, a trust is less tax efficient than a Family Investment Company, but that does not mean you should cancel out the idea of setting up a trust. Trusts are still widely used and need to be considered as part of your wealth and succession planning. The best option for you will be dependent on your personal circumstances, family needs and objectives, so seek professional advice from qualified tax advisors such as dns accountants.

For more help and advice on Family Investment Companies, trusts, tax and succession planning, contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

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