Family Investment Trusts and Family Investment Companies are both valuable vehicles for wealth management and succession planning, particularly for high net worth individuals and families. Their functionality and benefits can differ significantly, though, depending on an individual’s circumstances and objectives.
Below we will Family Investment Trusts (FITs), and how they compare to Family Investment Companies (FICs). We look at their key features, benefits, and potential drawbacks. We’ll also consider the relevance of these structures for UK domiciled and non-domiciled residents, and offer guidance on how to select the appropriate vehicle for your needs.
Family Investment Trusts
Family Investment Trusts (FITs) are discretionary trusts, essentially legal agreements in which an individual, known as a ‘settlor’, places assets into the trust, managed by trustees for the benefit of beneficiaries. Trusts are a time-honoured method for estate planning, offering numerous benefits in terms of control, tax efficiency, and asset protection.
Trusts offer a level of control over assets. The trustees have the legal title to the trust property and manage it according to the settlor’s wishes stipulated in the trust deed. This setup ensures assets are utilised for the benefit of beneficiaries as per the settlor’s intentions.
FITs can prove tax-efficient, especially for inheritance tax (IHT) planning. If the settlor survives seven years from the date of the gift into the trust, the asset is typically considered outside their estate for IHT purposes. However, this comes with certain constraints, such as the potential for periodic and exit charges within the trust and a limited nil-rate band. Furthermore, trusts are subject to different tax treatment on income and gains compared to individuals, often resulting in higher taxes.
Trusts offer protection against future creditors or matrimonial claims and are immune from changes in beneficiaries’ personal circumstances, providing a high degree of asset safety.
However, FITs are not without drawbacks. The seven-year rule for IHT can be a significant risk if the donor does not survive this period, and the tax benefits can be diminished. Additionally, the trustees have legal obligations, including potentially complex accounting and reporting requirements. Trusts are also subject to their own tax regime, which can lead to higher tax rates on income and gains than would be paid by an individual.
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Family Investment Companies
On the other hand, a Family Investment Company (FIC) is a private company whose shareholders are family members. FICs share some similarities with FITs but offer additional flexibility and potential tax benefits, depending on the family’s circumstances.
One of the main advantages of FICs is the flexibility they offer in terms of control and succession planning. The company’s articles of association can be structured to maintain control with certain family members, while allowing others to benefit from the company’s assets. This can be particularly beneficial for families wishing to involve younger generations in the management of family wealth, while still maintaining control.
FICs can also be more tax-efficient than FITs in certain circumstances. For example, corporation tax rates are typically lower than income tax rates, which can result in less tax on the company’s income and gains. Additionally, shares in a FIC can be given away without incurring an immediate IHT charge, regardless of the seven-year rule that applies to trusts.
However, there are potential drawbacks to FICs. The company’s accounts must be filed with Companies House and are publicly available, which may not be desirable for families seeking privacy. Additionally, the tax treatment of FICs can be complex and will depend on the specifics of the company and its activities.
FITs vs FICs: A Comparison
When comparing FITs and FICs, it’s essential to consider the family’s objectives, the nature of the assets involved, and the family’s tax position.
For families seeking to transfer wealth to younger generations while reducing IHT liability, a FIT may be the preferred option. The potential for assets to be outside of the donor’s estate for IHT purposes after seven years can be a significant benefit, however, this would also be the case where shares in a FIT were gifted away.
Transferring cash into an FIC does not attract the CLT IHT entry charge at 20%, unlike a trust, making it more favorable for someone planning on transferring funds over £325,000 but wanting to maintain some control1. However, FICs can be expensive to set up and involve ongoing administrative burdens. Also, dividends could be taxed twice: Corporation Tax on the company itself and Income Tax declared by the shareholder on a self-assessment tax return1.
A Family Investment Trust can offer flexibility, with the person putting assets into the trust (the Settlor) able to retain control as long as they don’t retain a benefit. Like with FICs, if the Settlor survives seven years from putting the assets into the trust, it falls outside of their estate for IHT purposes. However, unlike FICs, if the transfer into the trust exceeds the value of the nil rate band (currently £325,000), tax is charged at the rate of 20%, triggering an immediate tax charge. Additionally, the trust is subject to income tax, capital gains tax, and inheritance tax, and it also requires regular filing of returns and accounts with HMRC1.
The benefits and drawbacks of FICs and trusts can be influenced by the domicile status of the individuals involved. For non-resident, UK-domiciled individuals, an FIC can become a useful estate planning tool, particularly if it can be incorporated, managed, and controlled outside of the UK. For those resident in the UK but domiciled elsewhere, an offshore FIC may seem a natural fit, allowing mitigation of IHT without forcing a move overseas2.
For those whose domicile status is unclear, an onshore FIC could be useful as it can be structured to avoid loss of control and offer access to income. The seven-year period before a potentially exempt transfer will be exempt from IHT can be undertaken when the founder is young enough to insure against an unexpected IHT charge2.
Formerly domiciled residents (FDRs) and non-returning non-doms who have been resident in the UK for 15 out of 20 years may find an FIC useful in holding the assets. FDRs may find their previously existing structures ineffective upon becoming UK-domiciled for IHT purposes, and an FIC could potentially help in this situation, holding the assets which the FDR gifts before or during their first year of UK residency2.
Both FITs and FICs have a place in wealth management and estate planning, and the best choice depends on the specific circumstances. As alaways, you should seek professional financial advice when considering complex financial planning structures as described above
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