Sell a company, or simply build wealth, and the same question arrives: how do you pass it on without losing two-fifths to inheritance tax, or handing control to your children before they are ready? Two structures dominate the UK answer. The family investment company, a private company holding the family's capital, and the trust, the much older arrangement in which trustees hold assets for beneficiaries. They overlap in purpose and differ in almost everything else.
The comparison moved this spring. From 6 April 2026, 100% Business Property Relief, the inheritance-tax relief on qualifying business assets, is capped at the first £2.5m per person, under the reform GOV.UK confirmed in December 2025. The Carry's reading of that change is that it has pushed the FIC-or-trust question back onto adviser desks, because what a trust can shelter on the way in is now a fixed number rather than an open door. Here is how they compare.
One is a company with the family on the share register. The other is a promise policed by trustees.
What is a family investment company, and what is a trust?
A family investment company (FIC) is an ordinary private limited company set up to hold a family's investments. The founders fund it by subscribing for shares or lending it cash, and the share classes do the succession work: voting shares stay with the parents, shares carrying most of the future value go to the children.
A trust is not a company at all. It is a legal arrangement in which a settlor, the person giving assets away, transfers them to trustees, who own and manage them for the beneficiaries under a trust deed. Most lifetime family trusts today are discretionary, taxed under what HMRC calls the relevant-property regime: no beneficiary owns anything outright, and the trustees decide who benefits, and when.
The layer underneath is covered in angel investing personally vs through a limited company; a FIC is its family and succession version.
How did the 2026 £2.5m relief cap change the comparison?
It turned an open-ended trust route into arithmetic. From 6 April 2026, 100% Business Property Relief covers only the first £2.5m of combined qualifying business and agricultural property per person, with 50% relief above the cap and unused allowance transferable between spouses and civil partners, up to £5m for a couple, per the December 2025 GOV.UK announcement. Under the same reform, each relevant-property trust carries its own £2.5m allowance for 100% relief, refreshing every 10 years, per GOV.UK's Business Relief guidance. A settlor's personal allowance refreshes every 7 years of lifetime giving.
Why does a relief cap decide anything? Because of the trust gates. Trustees pay a 20% entry charge on chargeable lifetime transfers above the £325,000 nil-rate band, per HMRC's 2026 trusts and inheritance tax guidance. Qualifying unquoted trading shares inside the settlor's £2.5m allowance can enter a trust with that charge fully covered; above the cap, only half the value is relieved and the entry charge starts to bite. The full mechanics, anti-forestalling rule included, sit in Business Property Relief on EIS shares: the 2026 IHT cap.
A FIC feels none of this on the way in: funding your own company is not a gift. The reckoning comes later, through the value of the shares each family member holds.
How is a FIC taxed compared with a trust?
Differently at every stage: going in, sitting there, coming out. The table above lines the two up; here is the why.
A share-portfolio FIC is almost always a close investment-holding company, HMRC's term for a close company wholly or mainly making investments, and such companies pay the 25% main rate on all profits in 2026-27, with no small-profits rate or marginal relief, per GOV.UK's corporation tax rates. The softener is dividends: distributions a UK company receives are largely exempt, so portfolio income can compound inside with little drag. Interest and capital gains get no such pass. Then comes extraction: dividends paid out to family shareholders are taxed at 10.75%, 35.75% or 39.35% in 2026-27 above a £500 allowance, per GOV.UK's dividend tax rates. Where the founder funded the company by loan, repayments come back tax-free, which explains much of the design.
The trust runs on a different clock: up to 6% inheritance tax at each 10-year anniversary, exit charges of up to 6% on capital leaving, and the 20% entry charge already covered, with the full 40% in prospect if the settlor dies within 7 years, per HMRC's trusts guidance. Trustees also pay income tax and capital gains tax at trust rates as returns arise. Holdover relief may postpone the settlor's capital gains charge on assets entering a trust; HMRC's helpsheet HS295 is the starting point, personal advice the finish.
How do control and governance actually differ?
A FIC keeps control with the people who made the money; a trust gives it away by design. FIC founders hold the voting shares, sit as directors and write the articles, so they decide what the company buys, when dividends flow and who may ever join the share register. Children can hold most of the value and none of the say.
Trustees, by contrast, legally own the assets and must act for the beneficiaries as a class. A settlor can leave a letter of wishes. It guides; it does not bind. That surrender is the point, and it is exactly why the tax treatment differs.
One wrinkle completes the picture. Shares in an investment company do not qualify for Business Property Relief, which is reserved for trading businesses, per GOV.UK, so wrapping qualifying shares inside a FIC has relief consequences of its own, and they run the wrong way.
Which questions decide between a FIC and a trust?
Five, in most adviser conversations, and none has a universal answer. Fresh from a sale? The wider sequencing sits in what to do after selling your company; this is the layer above it.
- How much control do you need to keep? Total control points at a FIC. A genuine handover points at a trust.
- What is going in? Cash suits a FIC's loan-funded design. Qualifying trading shares bring the £2.5m allowance into play and change the trust arithmetic.
- How much is going in? Transfers within the £325,000 nil-rate band enter a trust without an entry charge; a couple with qualifying assets has up to £5m of combined relief allowance to plan around.
- Does the family need the income? A FIC rolls up returns cheaply but taxes them on the way out. Money needed for living costs weakens the case for locking it inside either structure.
- How long is the horizon? Trust charges arrive on a 10-year cycle; a FIC's costs, corporation tax, accounts, filings, arrive every year.
Two cautions belong in plain text. HMRC's anti-avoidance rules around trusts and family companies are long, specific and actively applied; tidy diagrams can fail on detail, and specific advice is essential. And this page is general information, not financial or tax advice. It describes how the structures work, not which one fits. That question belongs with an FCA-regulated adviser and a STEP-qualified solicitor, with the current rules checked at GOV.UK first.
Frequently asked questions
What is the difference between a family investment company and a trust?
A family investment company is a private limited company that holds a family's investments, with share classes arranged so the founders keep voting control while value builds for the next generation. A trust is a legal arrangement in which trustees own and manage assets for beneficiaries under a trust deed. The company keeps control with the family; the trust transfers both ownership and control to trustees.
Does a family investment company avoid inheritance tax?
Not by itself. Money inside a FIC belongs to whoever holds the shares, and each holding sits in that person's estate. What the structure allows is lifetime giving: shares passed to children are potentially exempt transfers, falling out of the giver's estate seven years after the gift, and future growth on those shares builds up in the children's hands. Note that shares in an investment company do not qualify for Business Property Relief, which applies to trading businesses.
What tax does a discretionary trust pay in the UK?
Three inheritance-tax charges shape the regime: an entry charge of 20% on chargeable lifetime transfers above the £325,000 nil-rate band, a charge of up to 6% at each 10-year anniversary, and exit charges of up to 6% when capital leaves. If the settlor dies within seven years of settling assets, inheritance tax at the full 40% can apply. Trustees also pay income tax and capital gains tax at trust rates on what the trust earns. HMRC's trusts and inheritance tax guidance on GOV.UK carries the detail.
How is money taken out of a family investment company taxed?
Dividends to family shareholders are taxed at the 2026-27 dividend rates: 10.75% basic, 35.75% higher and 39.35% additional, above a £500 tax-free allowance. Salaries are taxed as employment income in the normal way. Where the founder originally funded the company with a loan, repayments of that loan are a return of capital and carry no tax, which is why many FICs are built on loans rather than share subscriptions.
Should I set up a family investment company or a trust?
That is a question this article deliberately does not answer, because it turns on facts specific to you: how much control you want to keep, what assets are involved, whether the £2.5m relief allowance is in play, and how much your family needs the income. The comparison here is general information, not financial or tax advice. Check the current rules at GOV.UK and put the actual decision to an FCA-regulated financial adviser and a STEP-qualified solicitor.