A discretionary trust as a shareholder in the family investment company.

The settlor is the person who puts cash or shares into the trust, usually a parent or grandparent, and each person who settles uses their own nil-rate band. Trustees are chosen for trust, availability and independence: often a mix of family members and a professional or trusted friend. The settlor can act as a trustee, but must be excluded from benefit. We help families weigh who will still be around and willing in 20 years.

On each tenth anniversary of the trust, inheritance tax is charged on the value of the relevant property in it, at three-tenths of the effective rate calculated at the 20% lifetime rate. The maximum is therefore 6%, and the actual rate is lower where the nil-rate band covers part of the value. Because it uses the value at each anniversary, successful growth shares bear the charge on their grown value.

Inheritance tax is charged when property stops being relevant property, for example when shares are appointed out of the trust. The maximum is 6%. Before the first ten-year anniversary the rate is based on the value of the trust when it started, multiplied by the complete quarters elapsed out of 40, so early exits of low-value growth shares can be nil or very small, provided the settlor made no other chargeable transfers in the previous seven years. There is no exit charge in the first three months.

No. There is no exit charge on payments that are income of the recipient, or on payments of the trust's costs. So when the trustees receive a dividend from the family investment company and pass the income to a beneficiary, there is no inheritance tax exit charge, although income tax matters for both the trust and the beneficiary. Appointing the shares themselves, or capital, to a beneficiary can trigger a charge.

A discretionary trust usually has at least two trustees so that decisions are not made by one person, and three or four is common where family and a professional both serve. The deed says how trustees are appointed, retired and replaced, and may give the settlor or a protector a limited power to do so. The settlor should not be able to appoint themselves as a beneficiary. Trustees' roles are worth revisiting regularly.

If the settlor pays the 20% lifetime inheritance tax on the gift, rather than the trustees, the loss to the settlor's estate includes the tax paid. The net gift is grossed up, so the excess over the nil-rate band is multiplied by 100/80, an effective 25% on the excess, and the grossed-up figure goes into the settlor's seven-year cumulation. If the trustees pay, no grossing up is needed. Gifts within the nil-rate band avoid the question entirely.

The deed names a class of beneficiaries, for example the settlor's children, grandchildren and their spouses, and usually gives the trustees or another person a power to add more. The power must be drafted so that it cannot add the settlor or their spouse or civil partner, otherwise the gift can be one with reservation. Trustees decide which beneficiaries benefit and when. A letter of wishes tells them what you hope for.

The trust continues. The deed sets out how a replacement is appointed, usually by the remaining trustees or by a named person, and the trust's assets, including the shares, are held by the new trustees. The change is recorded on the Trust Registration Service and, where the trustees are people with significant control, reported to Companies House within 14 days. It is sensible to plan succession of trustees in the deed rather than leave it to chance.

They can. A person with significant control is someone with more than 25% of the shares or votes, the power to appoint most directors, or significant influence or control. Where a trust meets one of these conditions, its trustees are recorded as the people with significant control. Changes must be reported within 14 days. Holding growth shares through a trust therefore has a privacy implication to weigh in the design.

Trustees pay capital gains tax at 24% in 2026/27, with an annual exempt amount of £1,500. In practice the trust rarely sells, because the FIC shares are held for the long term and the company, not the trust, usually does the investing. If the trust becomes settlor-interested, tax consequences change, which is another reason the deed excludes the settlor, their spouse or civil partner, and for holdover their minor children.

A letter of wishes is a non-binding note from the settlor to the trustees saying how they hope the trust will be used, for example when to help grandchildren, how to treat different children and what to do if someone is divorced. It does not bind the trustees, but they must consider it. Most discretionary trusts have one, and we recommend families write it with their advisers and review it as circumstances change.

Usually the settlor gives cash to the trust, and the trustees use it to subscribe for newly issued growth shares at market value, which is a low figure at the start if the hurdle is at or above the company's value. What is valued for inheritance tax is the loss to the settlor's estate. Keeping the settled sum and the share value small keeps the entry charge down or nil.

In most cases the company is formed first, or at the same time, so there is something to subscribe for. The trust deed is signed, cash is settled, and the trustees subscribe for growth shares at the outset when the value is lowest. Gifting shares after the company has grown costs more in tax. The exact order depends on the funding and the documents, and we sequence them in the plan.

Usually not. The trust's growth shares are normally non-voting, so the parents keep control through their freezer shares and the trust cannot disrupt decisions. Some families give trustees limited rights over changes that affect the trust's own class. A settlor who acts as a trustee and votes shares in the beneficiaries' interests is not usually treated as a reservation of benefit, but what the settlor gets from the arrangement must be checked.

No. From 2027/28 new 47% property and savings trust rates apply to rent and interest that a trust receives directly. Dividends received from a family investment company are taxed at the dividend trust rate, which is 39.35% for 2026/27, and the rise in the ordinary and upper dividend rates did not change it. This is another reason that holding rental or savings income in the company, not in the trust, can matter.

A trust with net income of £500 or less pays no income tax on it, but above £500 all the income is taxable. Where the same settlor has made other qualifying settlements, the £500 is divided between them, down to a minimum of £100 each with five or more trusts. Settlor-interested trusts taxed on the settlor do not count. For most trusts holding FIC shares, dividends will exceed £500.