UK Family Investment Company vs Trust: Which is Better in 2026?

Introduction: Why Wealthy Families Use Structures

For individuals with substantial wealth, holding investments personally means paying income tax at up to 45% on income and capital gains tax at up to 24% on gains. When those individuals die, IHT at 40% applies to the estate above the nil rate band. The combined lifetime and death tax cost can be severe.

Family Investment Companies (FICs) and trusts are the two main structures used by advisers to address this problem. Both are legitimate tax planning tools; neither is a tax avoidance scheme. They work by moving assets into a structure where the tax treatment differs from personal ownership, and where control can be separated from economic benefit to facilitate wealth transfer.

What Is a Family Investment Company?

A Family Investment Company (FIC) is a UK private limited company (typically a standard company incorporated at Companies House) whose shareholders are members of the same family. The company holds investments -- typically a portfolio of shares, bonds, property, or cash -- rather than trading.

How FICs Are Structured

The founding generation (usually parents) typically contribute capital to the company as a loan or by subscribing for shares. The share structure is usually carefully designed with multiple classes:

• Founders hold voting shares -- giving them control over the company's decisions, including dividend payments
• Children and other family members hold non-voting growth shares -- entitled to dividends and capital growth, but without control
• Preference shares may provide a fixed income to founders, allowing them to extract value without losing control

This separation of voting rights from economic rights is the key design feature. The founders can transfer economic value to the next generation while retaining full control of when (and whether) dividends are paid.

Tax Treatment of FICs

Corporation tax on investment income: FICs pay corporation tax at 19% on profits below £50,000 (the "small profits rate") and 25% on profits above £250,000. Between £50,000 and £250,000, a marginal relief taper applies. For most FICs with investment income, the 19% or marginal rate applies -- considerably lower than the 45% rate payable by a discretionary trust.

Capital gains inside the FIC: Gains on investments held within the FIC are subject to corporation tax, not CGT. This means the rate is 19-25% rather than the 10-24% personal CGT rates. However, companies do not benefit from the annual CGT exemption (£3,000 for individuals in 2026/27), so gains are fully taxable.

Dividends extracted from the FIC: When shareholders take dividends from the FIC, those dividends are subject to dividend income tax at personal rates -- 8.75% (basic), 33.75% (higher), or 39.35% (additional rate) after the £500 annual dividend allowance. However, because the FIC has already paid corporation tax, dividends from a UK company are not also subject to income tax on the grossed-up amount in the same way as trust income -- there is no further grossing-up adjustment for UK dividends paid to individual shareholders.

IHT on FIC shares: The company holds assets, but the value transferred to children through the share structure is a lifetime gift. If the founder gives away growth shares at incorporation (when they have minimal value), the gift may be at near-zero value and grow within the children's shares tax-efficiently. If shares are given away when the company already has substantial value, the gift is a Potentially Exempt Transfer (PET) -- it falls out of the IHT estate if the donor survives 7 years.

Advantages of FICs

• Lower tax rates than trusts on ongoing income and gains
• Founders retain control via voting shares
• Flexible dividend policy allows income to be allocated to family members with lower tax rates
• Children's basic-rate bands can absorb dividends at 8.75% rather than the founder paying 39.35%
• Relatively straightforward to set up (standard company incorporation plus tailored articles)

Disadvantages of FICs

• Annual accounts, corporation tax returns, and Companies House filings add compliance costs
• Director responsibilities -- founders become directors with statutory duties
• No indexation allowance on capital gains (abolished for companies from 2018 onwards)
• Difficult to extract cash from the company without triggering income tax on dividends or creating a further taxable event
• HMRC scrutiny has increased -- poorly structured FICs may be challenged

What Is a Trust?

A trust is a legal arrangement where assets are transferred to trustees who hold them for the benefit of beneficiaries according to the terms of the trust deed. Trusts have been used for estate planning for centuries and remain a well-established structure in English law.

Types of Trust Relevant to Wealth Planning

Discretionary trust: Trustees have discretion over when and how to distribute income and capital to beneficiaries. HMRC taxes discretionary trusts heavily -- income at 45% (38.1% on dividends after the standard rate band of £1,000). Capital gains at 20% (or 28% on residential property) for trustees. IHT: 20% entry charge on value above the nil rate band, 6% periodic charge every 10 years on trust assets, and exit charges when assets leave the trust.

Bare trust: The beneficiary has an absolute right to income and capital. Income and gains are treated as belonging to the beneficiary for tax -- no additional trust-level tax rates apply. However, if the settlor (the person who created the trust) created it for their own minor children, the income is treated as the settlor's for income tax (the "parental settlement" rules).

Interest in Possession (IIP) trust: The beneficiary has an immediate right to income as it arises. Trustees pay basic rate income tax (20%) on income, and the beneficiary then claims the tax back if they are a non-taxpayer, or pays the balance if they are a higher rate taxpayer.

IHT Treatment of Trusts

Entry charge: Gifts into a discretionary trust above the nil rate band (£325,000) are subject to a lifetime IHT charge of 20% (half the standard 40% death rate). Multiple trusts created by the same settlor may share the same nil rate band.

10-year periodic charge: Every 10 years, the trust's assets above the nil rate band (minus any previous chargeable transfers) are charged at up to 6% (the "anniversary charge").

Exit charge: When assets leave the trust (distributed to beneficiaries), a proportional charge applies based on the rate that applied at the last 10-year anniversary.

Advantages of Trusts

• Established legal structure with centuries of case law
• Trustees can exercise discretion to benefit beneficiaries flexibly
• Useful where beneficiaries are young, vulnerable, or where the settlor wants protection against divorce or creditors
• Bare trusts are tax-transparent -- no additional trust-level tax
• Can hold wide range of assets including property and business interests

Disadvantages of Trusts

• High tax rates on discretionary trusts (45%/38.1% on income)
• IHT entry charge, 10-year charges, and exit charges create complexity and cost
• Trust registration (Trust Registration Service) adds compliance burden
• Trustees have legal responsibilities and potential personal liability
• Less useful since the 10-year charge can significantly erode value over time

FIC vs Trust: Side-by-Side Comparison

Which Is Better in 2026?

For most high-net-worth families with investment portfolios above approximately £2m, FICs tend to be preferred for the following reasons:

1. Lower ongoing tax rates -- 19-25% corporation tax versus 45% for discretionary trust income is a material difference that compounds over time
2. No 10-year IHT charge -- FICs do not face the periodic charge that erodes trust assets every decade
3. Control -- founders can structure voting shares to retain full control, which is not possible with a trust once assets are transferred
4. Flexibility -- different share classes can be issued to different family members; the company can be wound up if circumstances change

Trusts remain preferable when:

• Protecting assets for vulnerable or young beneficiaries where a trustee's discretion is genuinely needed
• Holding assets that cannot easily be transferred into a company (some types of property, agricultural assets with APR considerations)
• The family already has a trust structure from prior planning that would be costly to unwind
• The amounts involved are smaller and the IHT entry charge and 10-year charges are less material

Practical Considerations

Both structures require specialist legal and tax advice. Setup costs for a FIC (bespoke articles of association, share structuring, stamp duty, and accountancy) can range from £3,000 to £10,000 or more. Trusts require a solicitor-drafted trust deed and ongoing trustee advice.

Neither structure is effective for estate planning if the assets transferred are within 7 years of the settlor's death (for lifetime gifts). Both require careful documentation and ongoing compliance to survive HMRC scrutiny.

Frequently Asked Questions

Can I use a FIC and a trust together? Yes. Some families use both -- for example, a FIC holds the investment portfolio while a trust holds other assets for specific beneficiaries. The structures can complement each other, but the combined compliance burden is significant.

Does HMRC view FICs as aggressive tax avoidance? No. FICs are legitimate legal structures. HMRC has noted increased use of FICs and may scrutinise them more closely, but a properly structured FIC using commercial share classes and genuine family involvement is not a tax avoidance scheme.

What happens to a FIC when the founders die? The founders' voting shares form part of their estate and are subject to IHT in the usual way (unless a PET was made more than 7 years earlier). The non-voting growth shares already held by children are outside the founders' estate.

Can a FIC hold buy-to-let property? Yes, though there are specific considerations: stamp duty land tax is payable when property is transferred into the company, and the company faces corporation tax (not CGT) on gains. Mortgage finance can also be harder to obtain for companies. For buy-to-let, a company structure is often considered separately from a pure investment FIC.

Are trust 10-year charges avoidable? Not if assets are in a discretionary trust. The charges are embedded in the IHT legislation. Some planning (such as using multiple trusts set up on different dates to access multiple nil rate bands) has been restricted by anti-avoidance rules.

How long does it take to set up a FIC? Incorporation of a company at Companies House can be done in a day. However, the bespoke articles of association, share structure, and legal documents typically take 4 to 8 weeks with a specialist solicitor.

Can a non-domiciled individual use a FIC? The rules on non-domicile, FICs, and offshore structures are complex and have changed significantly in recent years. Specialist advice is essential for non-UK domiciled individuals.

What is the minimum sum to make a FIC worthwhile? There is no legal minimum, but the setup and ongoing costs (accounting, legal, corporation tax returns) mean FICs are rarely cost-effective for portfolios below £1m to £2m.

Can a trust hold shares in a FIC? Yes. Placing FIC shares into a trust can combine the tax advantages of both -- the FIC's lower tax rates on income, and the trust's ability to protect assets for future generations. However, this adds another layer of complexity and professional fees.

Are FICs affected by the new APR and BPR £1m cap? Generally no -- the APR and BPR caps apply to qualifying agricultural and business property, not to investment holding companies. A FIC holding shares and bonds is not a "trading business" for BPR purposes.