When it comes to preserving wealth for future generations, trusts and Family Investment Companies (FICs) offer distinct advantages in terms of control, wealth protection and inheritance tax (IHT) planning. This article introduces both estate planning structures, enabling you to consider which option may best align with your goals. So, whether you want to pass wealth on to the next generation, mitigate your IHT liability or benefit charitable causes, planning your legacy is important now more than ever. We are currently seeing the largest intergenerational transfer of wealth in history. According to the STEP Barometer report, $83 trillion will be transferred globally by 2045, with some sources estimating that up to £7 trillion will be transferred in the UK alone. The current "Great Wealth Transfer" calls for careful estate planning, with lawyers, accountants and financial advisers working together to develop a coordinated strategy that protects and preserves wealth for future generations.
Choosing the right structure for your family wealth
Trusts remain one of the most established vehicles in UK succession planning, which may be the best solution for you if you proceed with accurate expectations. A trust is a fiduciary arrangement that holds assets, such as cash, investments and property by trustees under a trust deed, on behalf of beneficiaries. There are different forms of trusts with discretionary trusts being most flexible ones to operate. Comparatively, FICs have become increasingly popular over the last decade. FICs are separate legal entities which hold investments in forms of cash, property or shares and generate returns for the shareholders. The shareholders typically hold different classes of shares with varying degrees of control and entitlement to dividends and voting rights.
"Those benefiting from your wealth then become stewards of it and not merely beneficiaries."
How trusts and FICs compare
When comparing trusts and FICs, several key distinctions emerge, so let's take a closer look. One factor often considered is privacy. Trusts can offer a greater degree of confidentiality than companies, as they are not generally required to publish ownership and governance information in the same way that companies do. However, trustees are subject to increasingly detailed regulatory and reporting requirements, and privacy should not be assumed to be absolute.
Taxation is another important area of comparison. When it comes to charges, trusts (specifically discretionary trusts) incur periodic ten-yearly charges at a rate of up to 6%, as well as exit charges, whereas FICs do not. Instead, income and gains generated within a FIC are generally taxed under the corporation tax regime, which is lower than the tax rates applying within discretionary trusts (although due regard should be given to how profits are ultimately extracted). Additionally, if relevant conditions are met, FICs' dividend income can be tax free, which does sound appealing, but do note that if you are planning on transferring non-cash assets into a FIC, you will incur capital gains tax charge on these transfers, whereas a trustee of a trust may have the option to claim holdover relief.
It seems like every benefit has a trade-off. Undoubtedly, trusts have been around for much longer, and some will find comfort in that. However, those who are used to running companies will have a greater understanding of the terminology and day-to-day management requirements of FICs. Ultimately, the decision may not be based on a 'pros & cons' list but rather based on what you feel most aligns with the way you operate, and how much involvement you want your beneficiaries to have.
Bringing the next generation into the conversation
FICs are managed by directors who must act in accordance with their statutory duties under company law, promoting the success of the company, whereas trustees of trusts are subject to fiduciary duties requiring them to act in the best interests of beneficiaries and in accordance with the terms of the trust. What this means is that FICs can offer greater scope for introducing the younger generation into the management of family wealth, as they can be involved as shareholders before becoming directors, encouraging strategic decision-making by family members about the preservation of their wealth. And in a way, those benefiting from your wealth then become stewards of it and not merely beneficiaries. However, if your preference is to appoint professional trustees to oversee succession and asset management (for example if your beneficiaries are minors) or if you simply do not deem it practical to be setting up a company, then a trust would be a better option.
A tailored approach to succession planning
But of course, in practice, trusts and FICs are not necessarily mutually exclusive and can often be combined within a broader succession planning framework. The most effective approach will depend on a family's objectives, asset profile and governance preferences, making specialist legal, tax and financial advice essential.
If you wish to discuss your trust or FIC options, please email a.morrison@stephens-scown.co.uk or contact Stephens Scown LLP on enquiries@stephens-scown.co.uk.
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