Family Investment Companies vs Discretionary Trusts: which is right for your estate? | Tardi Group

Family Investment Companies (FICs) and discretionary trusts are two of the most commonly used structures in UK estate planning. Both can help reduce an inheritance tax liability over time, protect assets across generations, and keep wealth within a family. But they are fundamentally different in how they work, how they are taxed, and who controls them.

Understanding the difference helps clarify which, or which combination, suits your situation.

What is a Family Investment Company?

A Family Investment Company is a private limited company, typically set up by parents or grandparents, into which assets (usually cash or investments) are transferred. The founding generation typically holds preference shares that carry income and capital rights but limited or no voting power, with ordinary shares transferred to children or grandchildren over time. [1]

Key characteristics:

The founders retain control through voting shares
Income and capital can be allocated to family members at different tax rates
Assets in the company grow outside the founder's personal estate (subject to a seven-year period or immediately if structured correctly)
The company pays corporation tax on investment income and gains (currently 25% for profits above £250,000) [2]
Children/grandchildren as shareholders benefit from company growth without receiving taxable income

Who it is for: Estates typically above £2 million where the founders want to retain control, families with multiple generations and varied income tax positions, business owners who prefer a corporate structure.

What is a Discretionary Trust?

A discretionary trust is a legal arrangement where you (the settlor) transfer assets to trustees, who hold them for the benefit of a class of beneficiaries (typically family members). The trustees have discretion over when and how to distribute income and capital, the beneficiaries have no automatic entitlement.

Key characteristics:

Assets are legally owned by trustees, not the settlor
Once assets are in the trust and seven years have passed, they are outside the settlor's estate
The trust pays its own tax: income tax at 45%, capital gains at 28% (residential property) or 24% (other assets), with a small standard rate band [3]
A ten-year periodic charge applies: up to 6% on the value of trust assets above the nil-rate band [4]
Exit charges apply when assets are distributed from the trust

Who it is for: Families wanting asset protection, controlled distribution, or IHT planning without the complexity of a corporate structure. Particularly effective for holding life insurance policies or investments below the ten-year charge threshold.

Side-by-side comparison

Feature	Family Investment Company	Discretionary Trust
Legal structure	Limited company	Trust deed
Control	Retained by founders via voting shares	Held by trustees
Entry cost	Moderate (legal + accountancy)	Lower (trust deed + registration)
Ongoing costs	Annual accounts, corporation tax returns	Annual trust accounts, tax returns
IHT on entry	No immediate charge (shares gifted over time)	20% charge if over nil-rate band (£325,000)
Periodic charges	None	Up to 6% every 10 years
Corporation/trust tax	25% corporation tax on profits	45% on trust income above standard rate band
Flexibility	High: company can be restructured	High: trustees have full discretion
Minimum estate size	~£2m+ to justify costs	Any size
Estate removal	Gradual via share transfers	Immediately on settlement (subject to entry charge)

When a FIC is the stronger choice

Your estate is above £2 million and you have investable assets to transfer
You want to retain control, voting shares mean founders stay in charge
Your family includes children or grandchildren at lower tax rates, enabling efficient income distribution
You are a business owner comfortable operating a corporate structure
You have a long time horizon, the FIC becomes more efficient as share transfers accumulate

When a discretionary trust is the stronger choice

You want assets legally separated from your estate immediately (subject to the entry charge if above the NRB)
You want asset protection, trust assets are harder to attack in the event of a beneficiary's divorce or bankruptcy
You are holding a life insurance policy that should sit outside the estate
The estate is smaller and a corporate structure is disproportionate to the assets involved
You want flexibility over beneficiaries without committing to specific shares

Can you use both?

Yes. Many estates use a combination: a FIC for the main investment portfolio, with a discretionary trust for life insurance or smaller ringfenced assets. The structures are not mutually exclusive and can complement each other within a co-ordinated estate plan.

Frequently asked questions

Is a Family Investment Company legal for IHT planning? Yes. FICs are a legitimate planning structure used widely in the UK. HMRC has reviewed them and there is no specific anti-avoidance legislation targeting FICs, though the rules applicable to close companies and investment income must be observed.

How much does it cost to set up a FIC? Setup costs typically range from £5,000–£15,000+ depending on complexity, covering legal documentation, company formation, and initial accounting advice. Ongoing costs include annual accounts, corporation tax returns, and potentially a company secretary.

What are the ten-year trust charges? Every ten years, a discretionary trust pays a periodic charge of up to 6% on the value of trust assets above the available nil-rate band. On a trust holding £1 million (with a £325,000 nil-rate band), this would be up to £40,500, which is still typically far less than the IHT that would be charged if the assets remained in the estate. [4]

Can HMRC challenge my FIC? HMRC can challenge any arrangement it considers to be a tax avoidance scheme. FICs structured with genuine commercial purpose, proper documentation, and no artificial features are well-established and not generally at risk. Professional advice on structuring is essential.

This article provides general information only and does not constitute personal financial or tax advice. Tardi Group recommends professional advice before establishing any estate planning structure.