Family investment company vs trust: which is right?

A gift into a discretionary trust is a chargeable transfer, taxed at 20% on the excess over the available nil-rate band, with further ten-yearly and exit charges. A family investment company has no ten-yearly or exit charges, and a gift of shares to an individual is a potentially exempt transfer. The company's shares do remain in each shareholder's estate. The right choice depends on how much you give, to whom and how flexible you need to be.

Not if you lend the money. A loan is not a gift. If you give cash to adult children who then subscribe for shares, that is a potentially exempt transfer, with no entry charge. A cash gift made directly to the company is different: it is not a potentially exempt transfer and is an immediately chargeable transfer, so the 20% rate can apply above the nil-rate band. How the company is funded therefore matters a great deal.

The maximum is 6% of the value of the relevant property at each ten-year anniversary. It is three-tenths of the effective rate on a notional transfer, calculated at the 20% lifetime rate, so the actual rate is lower where the nil-rate band covers part of the value. A trust holding successful growth shares can face charges on the grown value, so a low value at the start does not cap later charges.

A discretionary trust. The trustees choose who benefits and when, and the beneficiaries can be defined as a class that includes people not yet born. Shares in a company belong to named individuals, and changing who owns what means gifting or transferring shares. A family investment company can build in flexibility through separate share classes, but a trust as a shareholder gives the most. That is why we often combine them.

Broadly, yes. If you fund the company with a loan, it can repay the loan to you over time, and repayments are not taxed as income because they are your own money returning. If you gift cash or shares to a trust, you generally cannot take it back, and a trust that lets you benefit can mean the gift stays in your estate. The trust deed normally excludes the person who set it up.

A discretionary trust pays income tax at 39.35% on dividends and 45% on other income, with a £500 de minimis. A family investment company pays corporation tax, usually 25% on interest and gains, and most dividends it receives are exempt. A company is typically cheaper for reinvesting, but the shareholders are taxed when dividends are paid out. A trust holding company shares pays tax on the dividends it receives.

Holdover relief is available for a gift of shares into a discretionary trust, because it is a chargeable transfer, but not where the trust can benefit you, your spouse or your minor children. Business gift holdover is not available on shares in an investment company, so a gift of those shares to an individual normally triggers a gain at market value. Giving shares early, before they have grown, keeps the gain small.

Neither is fully private. A limited company files accounts at Companies House, where they are public, and people with significant control are on the public register. A trust holding company shares must register with the Trust Registration Service. An unlimited company can avoid filing accounts, subject to conditions and with unlimited liability for its members. If privacy matters, it should be discussed at the outset, before the structure is chosen.

Yes. A person who acts as a trustee and votes the trust's shares is not in itself making a gift with reservation, provided any pay is not excessive and the votes are used in the beneficiaries' interests. What matters is that the settlor and their spouse are irrevocably excluded from benefiting. If they can benefit, even in theory, the gift can remain in the settlor's estate for inheritance tax.

Not safely. If you are, or could be added as, a beneficiary, the gift is a gift with reservation and stays in your estate, on top of the chargeable transfer. The trust's income can also be taxed on you. Capital gains holdover is lost if you, your spouse or your minor children can benefit. A well-drafted discretionary trust therefore excludes you, your spouse and your minor children from benefit.

Because each covers the other's weakness. The company gives parents control through voting and freezer shares, flexible dividends through alphabet shares and no ten-yearly charge on most of the value. The trust holds growth shares for children and future generations, adds flexibility over who benefits and when, and can help protect shares from leaving the family. Using both lets each do what it does best.

It can still make sense, but you should weigh the cost. Above the nil-rate band, a transfer into a discretionary trust is charged at 20%. A couple can each use their available nil-rate band, but any other chargeable transfers in the previous seven years reduce it. Alternatively, if the children are adults, a gift of shares to them is a potentially exempt transfer. The right route depends on your priorities and how far you trust the next generation.

No. The shares are relevant property in the trust, so the ten-yearly charge applies to their value at each anniversary, up to 6%. What helps is that the growth shares were issued at a low value, so entry and early exit charges can be nil or very small, provided the settlor made no other chargeable transfers in the previous seven years. A family investment company that is owned by individuals directly has no ten-yearly charge, which is why the balance between trust and individual holdings is a design question.

Generally not. A beneficiary of a discretionary trust has no right to the capital or income, so it is not counted in their estate on death. The trust itself faces the ten-yearly and exit charges instead. Shares held directly by a child do form part of the child's estate. Which is better depends on the family's plans, the sums involved and whether the next generation would prefer certainty or flexibility.

Both need properly drafted documents. For a trust, that is a trust deed. For a company, it is articles of association with the share classes and, normally, a shareholders' agreement and a loan agreement. Our in-house legal team can draft the trust deed, articles and shareholders' agreement, or we work with your own solicitor, whichever you prefer. In both cases, the tax design comes first and the documents follow.

Neither is better by size alone. Larger estates often use both, because the nil-rate band covers little of a big gift and growth shares can be settled at a low starting value. We work with families from about £1m to £50m, and the answer turns on the family's aims, the assets and the age of the children. The honest answer can be a blend, a trust only or no new structure at all.