Family investment company or trust: how to choose

Families who want to pass on wealth while keeping some control usually come to two structures: a family investment company (FIC) and a family trust. They overlap in purpose and differ in almost every detail that matters: control, tax, cost and protection. This guide compares them, and explains when families use both.

It is general information. The right answer for a family depends on its own facts, and it should be reached with professional advice.

The short comparison

Ownership. In a company, the owners are the shareholders, and each has defined rights. In a trust, the trustees hold the assets, and the beneficiaries have rights against the trustees rather than to the assets themselves.

Control. A company is run by its directors, and the founders can be the directors and can hold voting shares. A trust is run by its trustees, who owe duties to the beneficiaries. A founder who sets up a trust usually cannot keep the same freedom over the assets.

Flexibility. A discretionary trust can decide, year by year, who benefits, which is powerful where the family does not want to fix entitlements in advance. A company's entitlements are fixed by its share classes and can only be changed with some difficulty.

Protection. A trust can protect beneficiaries who are young, vulnerable or likely to squander what they receive, because they do not own the assets. Shares in a company belong to the shareholders, and a shareholders' agreement can restrict what they do with them but cannot match that protection.

Inheritance tax on set-up. Gifts of shares to individuals are normally potentially exempt transfers, with no charge when they are made. Lifetime gifts into most trusts are chargeable and can carry an entry charge above the nil-rate band, and the trust then bears periodic and exit charges.

Tax on the income and gains. A company pays corporation tax on its investment returns, with dividends it receives generally exempt. Trusts pay income tax at rates close to the top personal rates on most of their income, and a separate capital gains tax regime on gains. For a family investing for the long term, the company's rate can be lower.

Tax when money comes out. A company's profit is taxed again as a dividend, though a founder's loan can be repaid without that charge. A trust's distributions carry credits for the tax the trust has paid, and the position of the beneficiary depends on the type of trust.

Administration and cost. A company has accounts, corporation tax returns, Companies House filings and directors' duties. A trust has its own tax returns, a registration with HMRC and trustees' duties. Neither is cheap; the costs differ in character rather than in size.

Privacy. A company's filings at Companies House are public, including information about its shareholders. A trust's details are registered with HMRC and are not on the public record in the same way.

When a family investment company tends to suit

• The founders want to keep control of the investments and the dividends.
• The beneficiaries are adult family members who can be trusted with shares.
• The family likes the idea of a governance framework with board meetings and a shareholders' agreement.
• The family wants corporation tax rates on the investment returns.
• The founders want to give shares immediately without an inheritance tax entry charge.

When a trust tends to suit

• Beneficiaries are young, vulnerable or likely to be at risk, and should not have direct ownership.
• The family wants flexibility over who benefits, and when.
• The assets include property or other holdings where the trust's tax treatment is favourable.
• The family accepts an entry charge and periodic charges for the protection and flexibility.

Using both

A common combination is a FIC whose shares are held partly by individuals and partly by a trust. The company provides the governance, the control and the corporation tax treatment; the trust provides protection for shares held on behalf of children or grandchildren. The cost is that the family now has both structures to run, and the tax of each must be planned with the other: gifts into the trust may carry an entry charge, and the trust's holding must be taken into account in dividend planning.

A note on change

Both structures have attracted attention. Trusts were reshaped by the rules introduced in 2006, which is why most lifetime gifts into them now carry an entry charge, and HMRC has examined family investment companies as an inheritance tax planning vehicle. A company is generally less flexible than a discretionary trust on income and asset protection. Whichever route is chosen, advice should be taken before and after it is set up, and the structure reviewed regularly.

Questions to answer first

1. Who should have control, and for how long?
2. Who are the beneficiaries, and what are they like with money?
3. Does the family need flexibility about who benefits in future?
4. What are the assets, and what would it cost to move them?
5. How much administration will the family accept?
6. How important is privacy?
7. What are the tax positions of the founders and the beneficiaries today?

The answers usually point towards one structure or towards a combination. Our family investment company service starts with these questions. For the detail of the company route, see our guides to benefits and uses and tax.