For a UK property-owning family planning intergenerational wealth transfer, the principal structural choice has historically been between a Family Investment Company and a discretionary trust. Both vehicles move beneficial ownership of property out of the founder's estate; both provide a flexible mechanism for distributing income and capital to family members; both produce a meaningful IHT outcome on death compared to direct personal ownership.
They are not, however, interchangeable. The income-tax rates differ materially (trusts pay tax at 45% on most rental income; FICs pay corporation tax at 19% to 25%). The IHT entry treatment differs (trusts attract an immediate lifetime IHT charge on transfers above the nil-rate band; FICs do not). The trust's ten-yearly periodic IHT charge has no FIC equivalent. The governance models are fundamentally different (trustee discretion vs share-class allocation). And the practical administration costs sit at different scales.
This page is the side-by-side tax-side comparison. The FIC structural detail is in our FIC comprehensive reference; the threshold "should I use an FIC at all?" question is in the FIC: is it worth it? page.
The Six Axes of Comparison
The two routes diverge meaningfully on six dimensions:
| Axis | FIC | Discretionary trust |
|---|---|---|
| Setup cost | £10k-£25k | £5k-£15k |
| Ongoing annual cost | £4k-£8k | £2k-£4k |
| IHT entry charge | None (share capital, not a chargeable transfer of value) | 20% on value above NRB (rising to 40% on settlor death within 7 years) |
| IHT periodic charge | None | Up to 6% every 10 years on value above NRB |
| Income tax on rental profits | 19%-25% corporation tax + dividend tax on extraction | 45% trust rate above £500 standard band |
| CGT on disposal | 19%-25% corporation tax on chargeable gains (indexation frozen Dec 2017) | 24% trustee rate on residential gains, £1,500 annual exempt |
| Governance | Voting and growth share classes; articles of association reserve control | Trustee discretion within trust deed; settlor can be a trustee |
| Flexibility on distributions | Dividends declared by directors per share-class rights | Trustees distribute at their discretion to any beneficiary |
IHT: The Most Important Difference
Entry Charge
Putting property into a discretionary trust above the nil-rate band (currently £325,000) attracts an immediate 20% lifetime IHT charge on the excess. If the settlor dies within 7 years of the transfer, the rate steps up to the 40% death rate on the original transfer (with taper relief between years 3 and 7).
For a transfer of £2m of property to a trust by a sole settlor with no other recent gifts, the immediate charge is roughly £335,000 (20% × (£2m - £325k)). If the settlor dies within 7 years, the additional charge can be a further £335,000 (taking the total to £670,000).
Transferring property to an FIC produces a CGT event at market value (potentially relieved by s.162 incorporation relief) but no IHT entry charge. The shares received in exchange for the property are then in the founder's estate at market value (typically the same as the property value, less the corporate-discount valuation reduction), but no charge crystallises at the transfer point.
Periodic and Exit Charges
A discretionary trust pays a periodic IHT charge every ten years under IHTA 1984 ss.64-65, of up to 6% of the trust value above the nil-rate band. For a trust holding £3m of property, the ten-yearly charge can be £160,000 or more. Exit charges apply on capital distributions out of the trust, with a similar tax rate computed on the days-since-the-last-ten-yearly basis.
An FIC has no equivalent charges. The corporate structure pays corporation tax on its income and gains; there is no IHT impost on the company itself.
On the Founder's Death
For a discretionary trust, the founder's death does not trigger an additional charge on the trust assets (the trust is a separate person for IHT). For an FIC, the founder's death triggers IHT on the value of the founder's shares (typically the A-shares with retained voting rights), at the 40% rate above the nil-rate band. BPR does not apply for a standard property-investment FIC.
The cumulative IHT outcome over a 20- to 30-year horizon depends heavily on the trust's periodic-charge accumulations versus the FIC's death-charge on the founder's A-shares. For substantial wealth (£5m-plus) the periodic-charge cost on the trust often exceeds the FIC's death charge, particularly where the FIC's growth-share architecture has shifted most of the underlying value to the children's class.
Income Tax: Where the Trust Looks Bad in Isolation
The headline trust income-tax rate is materially worse than the FIC corporate rate.
| Income type | Trust rate | FIC corporate rate |
|---|---|---|
| Rental income (above £500 standard rate band) | 45% | 19% (small profits) to 25% (main rate) |
| Dividend income (above £500 standard band) | 39.35% trust rate | Generally not relevant for property FICs (FIC receives no dividend income) |
| Savings income (above £500 standard band) | 45% | 19%-25% |
On a portfolio generating £100,000 of net rental profit after expenses, the headline tax is:
- Trust route: £45,000 trust income tax (£500 at 0% + £99,500 at 45%).
- FIC route: £19,000 corporation tax (assuming small profits rate of 19%, which a non-CIHC FIC achieves; CIHC FICs may face the 25% main rate).
The £26,000 headline gap is the principal income-tax argument for the FIC. The complication is what happens on extraction: trust distributions to beneficiaries carry through the trust's tax credits to the beneficiary, who is taxed at their own marginal rate; FIC dividends are taxed at 8.75% to 39.35% on the recipient, without further credit for the corporation tax already paid.
The combined effective rate (corporate plus dividend extraction) on the FIC route for a higher-rate-taxpayer recipient is roughly: 19% corp tax + (33.75% dividend tax on the 81% post-corp-tax amount) = 46.3% effective. The trust route's beneficiary-rate flow-through for a basic-rate beneficiary is 40%; for a higher-rate beneficiary 45% (matching the trust rate). The combined-rate comparison favours the FIC where extraction is to basic-rate or non-taxpayer recipients (children at university with no other income), and the trust where extraction is to higher-rate recipients.
CGT: Roughly Equal
For residential property gains, the trustee CGT rate is 24% (with a £1,500 annual exempt amount per trust, reduced to £750 for trusts within the standard reduction rule). For an FIC, gains are within corporation tax at 19% to 25%.
On a £500,000 chargeable gain:
- Trust: £119,640 (£500k less £1.5k AEA × 24%).
- FIC: roughly £125,000 (at the 25% main rate; less at the 19% small profits rate if the company is below the £50k profits threshold from other sources).
The two routes are within £10,000-£15,000 of each other on typical residential gains. CGT is rarely the decisive factor.
Governance and Control
A discretionary trust gives the trustees wide discretion over income and capital distributions, within the limits of the trust deed. The settlor can be a trustee (and usually is), giving the settlor real influence over trustee decisions during the settlor's lifetime. The downside: trustees are subject to fiduciary duties to all beneficiaries, and a settlor-as-trustee cannot legally act against the interests of other beneficiaries to favour themselves.
An FIC concentrates control in the voting-share class (typically held by the founder). The articles of association lock in the voting structure; directors run the company under the supervision of the voting shareholders. The founder can hold all voting rights and make all economic decisions during their lifetime without trustee-style fiduciary constraints (the founder owes shareholder duties, but the founder controls who the shareholders are through the share-class structure).
For founders who want maximum personal control during their lifetime, the FIC's voting-share architecture is cleaner than trustee discretion. For founders who want flexibility to respond to evolving family circumstances (one child develops health issues, another becomes wealthy independently), the trust's discretionary nature is more nimble.
The Combined Structure
For substantial wealth (typically £5m-plus), the standard answer is often both: a discretionary trust holds the growth shares of an FIC. The trust provides the discretionary flexibility on distributions; the FIC provides the corporate-rate income-tax efficiency.
The combined structure carries both sets of administrative costs (FIC accounts + trust accounts; two tax returns; potentially professional trustees). It also exposes the trust to its ten-yearly periodic charge, computed on the value of the trust's FIC shares (which can be argued at a meaningful discount for lack of marketability and minority control). For sub-£5m portfolios, the combined structure is usually administrative overkill.
Worked Example: £3m Portfolio, Three Children Aged 18-25
Family circumstances: founder in their early 60s, £3m residential property portfolio generating £140,000 net rental profit, three children aged 18, 22, and 25 (the older two earning around £30k each in their first jobs, the youngest at university with no income).
Trust Route
- Setup: £12,000 (legal drafting of discretionary trust with father as trustee plus two professional trustees).
- Entry charge: 20% × (£3m - £325k) = £535,000 IHT on transfer in.
- Annual: £45,000 income tax on £100,000 rental above standard band (after £500 SB). £4,000 annual trust admin.
- Ten-yearly charge: roughly £160,000 every 10 years on £3m value above NRB.
- Distributions to children carry credit for tax already paid; the youngest beneficiary (university student) can receive distributions taxed only at her own marginal rate (0% within personal allowance), creating effective tax efficiency for the youngest.
FIC Route
- Setup: £20,000 (Ltd Co formation, share-class drafting, shareholders' agreement).
- Entry: no IHT charge. CGT crystallises on incorporation (potentially deferred under s.162 if Ramsay test met). SDLT at standard residential rates plus 5% surcharge on transfer in: roughly £335,000 on a £3m transfer.
- Annual: £19,000 corporation tax on £100,000 profit (if small profits rate available; £25k if main rate). £6,000 annual FIC admin.
- Growth-share architecture: future capital growth on the property accrues to the children's B-share class, not to the founder's A-shares. No periodic IHT charge.
- On founder's death: IHT at 40% on the founder's A-share value (typically low, after the share-class structuring works as intended).
Comparison Summary
| Tax category | Trust route (over 20 years) | FIC route (over 20 years) |
|---|---|---|
| Day-one charges (entry) | £535,000 IHT | £335,000 SDLT + (£0 to £200,000) CGT depending on s.162 outcome |
| Annual tax on £100k profits | £45,000 × 20 = £900,000 | £19,000 × 20 = £380,000 (plus dividend tax on extracted amounts) |
| Periodic IHT (every 10 years) | ~£320,000 (two cycles) | £0 |
| Total ~20-year tax (excluding dividend extraction on FIC) | ~£1.75m | ~£0.7m to £0.9m |
The headline gap of around £900,000 over 20 years is the FIC's structural advantage. The qualifications: the FIC numbers exclude dividend-extraction tax on amounts actually distributed (typically materially less than the trust's £900k IT on retained profits, because much of the FIC's profit can be retained against future property acquisitions or debt repayment without dividend-tax crystallisation).
When the Trust Route Genuinely Wins
Despite the headline numbers, the trust route can be the right answer where:
- The portfolio is small (sub-£2m), where the FIC's structural overhead is excessive relative to the tax saving.
- Beneficiary flexibility matters more than tax efficiency: families with uncertain beneficiary outcomes (potential vulnerable beneficiaries, distant family branches that may or may not be included) benefit from trustee discretion.
- The settlor has a short time horizon: the FIC's growth-share accrual benefit needs 10 to 20 years to compound; a settlor in their late 70s may not see the benefit.
- The portfolio is not generating rental income: where the assets are growth-only (development land, equity-style stakes in property funds), the FIC's corporate-rate income-tax benefit does not apply.
When the FIC Route Genuinely Wins
- Portfolio £2m-£15m with active rental income: the FIC's corporate-rate income-tax saving compounds rapidly.
- Founder wants retained personal control during lifetime: the voting-share architecture is cleaner than trustee discretion.
- Time horizon 15+ years: the growth-share accrual mechanism delivers its benefit over a generation, not over a decade.
- Founder is in good health and not facing imminent IHT crystallisation: the FIC entry has no IHT charge but the founder's residual shares are in the estate; if the founder dies shortly after FIC formation, the structural benefit has not yet accrued.
How to Choose
The decision matrix for most families:
- Portfolio under £2m, founder over 70: lifetime gifting + simple will, neither FIC nor trust.
- Portfolio under £2m, founder under 70: discretionary trust (lower overhead, flexibility).
- Portfolio £2m-£15m, founder under 70, 15+ year horizon: FIC.
- Portfolio £5m+, complex beneficiary picture: combined FIC + trust structure.
- Portfolio £15m+, international beneficiaries: combined FIC + trust + bespoke international wrapper.
The decision turns ultimately on the specific portfolio, the founder's age and health, the beneficiary picture, and the family's appetite for ongoing administration. A formal model of both routes for the specific facts is the standard pre-decision step.