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.