Family Investment Company vs Trust: Which Might Be Right for Your Family?
Hoxton Blog • Family Investment Company vs Trust: Which Might Be Right for Your Family?
For generations, trusts have been one of the traditional tools used by families looking to pass wealth down without simply handing significant assets outright to children or grandchildren.
Family Investment Companies (FICs) offer another route.
Both can form part of long-term estate and succession planning. Both can help families separate control of wealth from who ultimately benefits from it. But they achieve those objectives in fundamentally different ways.
The important question is therefore not whether a FIC is "better" than a trust. It is what does the family need the structure to do?
For some families, retaining direct control over how wealth is invested will point towards an FIC. For others, the discretion and protection offered by a trust will be far more important.
And sometimes, the answer may involve both.
The Fundamental Difference
A trust and an FIC are different legal structures.
With a discretionary trust, assets are transferred to trustees, who become responsible for holding and managing them for a class of beneficiaries. The trustees decide how and when beneficiaries benefit, within the terms of the trust.
An FIC is a company. It has directors and shareholders and is governed by company law and its constitutional documents.
That difference matters because it determines where control sits.
With a trust, responsibility for the assets sits with the trustees.
With an FIC, the founder can potentially remain a director and retain voting rights, while other family members participate in income, capital or future growth through different classes of shares.
That distinction is often at the heart of the choice.
Control or Discretion?
Imagine parents with significant investment wealth who want to start planning for the next generation.
They are comfortable with their children benefiting from that wealth eventually, but they are not ready to hand over control of the investments today.
An FIC can be designed so that the parents retain voting control and continue making the important decisions about the company and its investments, while other family members hold shares carrying different economic rights.
For that family, retaining control may be the priority.
Now consider a different family.
The parents know they want their wealth to benefit their children and grandchildren, but they do not yet know who will need what. One child may eventually need more support than another. There may be young grandchildren, future grandchildren or beneficiaries whose circumstances cannot yet be predicted.
Here, a discretionary trust may offer something an FIC cannot replicate in quite the same way: discretion.
The trustees can determine who benefits, when and by how much, rather than economic ownership having already been allocated through the company's share structure.
That flexibility can be extremely valuable.
What If the Next Generation Is Not Ready?
This is another area where trusts can have a clear role.
Families are not always comfortable with children or grandchildren owning significant value directly, even where their shares do not carry control of the underlying investments.
A beneficiary may be young, financially inexperienced or simply at a stage of life where the family does not consider direct ownership appropriate.
A discretionary trust can allow wealth to be held for that beneficiary without giving them an immediate proprietary entitlement to the underlying assets.
With an FIC, family members who own shares are shareholders. Their rights can be carefully designed and restricted, but they nevertheless have an ownership interest in the company.
That difference should not be underestimated.
If the objective is "I want this person to benefit, but I do not want them to own the wealth yet", a trust may therefore be the more natural starting point.
If the objective is "I am comfortable giving the next generation an economic interest, but I want to retain control over the underlying family wealth", an FIC may be more attractive.
The Inheritance Tax Position Is Very Different
Tax is inevitably part of the comparison, particularly where substantial sums are involved.
Most lifetime transfers into a discretionary trust fall within the inheritance tax relevant property regime. Broadly, transfers above the available nil-rate band can therefore create an immediate inheritance tax charge.
Once assets are in the relevant property regime, the trust may also be exposed to periodic inheritance tax charges at ten-year anniversaries and proportionate exit charges when value leaves the trust.
That can limit the amount of substantial investment wealth a family is comfortable transferring into trust at one time.
An FIC does not sit within that trust regime.
Instead, its inheritance tax treatment depends upon how the company is established, funded and owned, and how value is subsequently transferred between family members.
That can create different planning opportunities, particularly where significant capital is involved.
But it is important not to oversimplify this into "FIC equals inheritance tax saving". An FIC does not automatically remove the founder's wealth from their estate. The outcome depends on the structure and what the founder actually gives away.
We explore the mechanics of transferring value and retaining control separately in Passing on Wealth Without Giving Up Control.
What About Income and Investment Growth?
The tax regimes are also fundamentally different.
A discretionary trust is taxed under the trust tax regime. Retained income can be subject to the trust rates of income tax, while trustees are also subject to capital gains tax when gains arise.
An FIC is subject to corporation tax rules instead.
That can make a corporate structure attractive where significant investment returns are expected to remain within the company and be reinvested over a long period. But it does not follow that an FIC will always produce a lower overall tax bill.
If profits ultimately need to be extracted and paid to individual shareholders, further personal tax may arise.
The relevant comparison is therefore not simply the tax rate paid by the trust against the corporation tax rate paid by the FIC. The whole lifecycle of the money needs to be considered.
We look at that separately in The Tax Lifecycle of a Family Investment Company and Are Family Investment Companies Still Tax Efficient?
Both Involve Ongoing Responsibility
Neither structure should be established on the assumption that it can simply be left alone once the initial planning is complete.
Trustees have legal and fiduciary responsibilities and the trust may have ongoing tax, reporting and administrative requirements.
An FIC is a genuine company. It requires proper accounts, corporation tax compliance, Companies House filings and appropriate corporate governance.
The right comparison is therefore not between a complicated trust and a simple company.
Both require proper administration. They simply require different forms of administration and governance.
When Might a FIC Be the Stronger Fit?
A FIC may be particularly worth considering where there is substantial capital available for long-term investment and the founder:
- wants to retain meaningful control over the underlying investments;
- is comfortable giving other family members an economic interest;
- wants the ability to distinguish between voting, income and capital rights;
- expects a significant proportion of investment returns to remain within the structure and be reinvested; and
- is comfortable with the cost and responsibility of operating a genuine company.
The combination is important. A FIC is rarely compelling because of one feature alone.
When Might a Trust Be the Stronger Fit?
A trust may be more appropriate where:
- flexibility over which beneficiaries ultimately receive wealth is important;
- the family does not yet know how wealth should ultimately be divided;
- beneficiaries are young or financially inexperienced;
- protection is more important than giving beneficiaries an immediate ownership interest; or
- trustee discretion over the timing and amount of distributions is central to the plan.
In those circumstances, the very feature that can make a trust appear less attractive to some founders - handing responsibility to trustees - may actually be exactly what the family needs.
It May Not Be FIC Or Trust
The comparison is also not necessarily binary.
A family may already have trusts as part of its estate planning and use an FIC alongside them. In some circumstances, a trust might itself hold shares in an FIC.
That can potentially combine aspects of both structures: the corporate framework and governance of the FIC, alongside the discretion available within the trust.
Different pools of family wealth may also justify different treatment. The appropriate structure for a substantial investment portfolio will not necessarily be the appropriate structure for every asset the family owns.
The objective should be to build a coherent family wealth plan, rather than select one structure and try to make everything fit within it.
Start With the Family, Not the Tax Structure
The most useful question is not:
"Is a FIC better than a trust?"
It is:
"What are we trying to achieve with this wealth?"
- Do you know who should ultimately benefit?
- Do you want them to own value now, or simply have the possibility of benefiting later?
- How important is it that you continue controlling the underlying investments?
- Do you need access to the capital or income yourself?
- How long is the structure expected to last?
- And how much flexibility will the family need if circumstances change?
Those answers are more important than choosing between two labels.
For some families, the ability to retain control while beginning a gradual transfer of economic value makes an FIC extremely useful. For others, the discretion and protection of a trust cannot be replicated adequately through a company. And for families with more complex estates, the best answer may be a combination of structures working together.
At Hoxton Tax, we advise families on the tax implications of FICs, trusts and wider estate planning, helping them understand how different structures interact rather than considering any one solution in isolation.
How Can We Help You?
If you would like to speak to one of our advisers, please get in touch today.
Contact Hoxton Wealth
We are available to discuss how Hoxton Wealth can help you achieve your financial goals. Together, we can help you build a brighter financial future.
