Family Investment Companies and IHT UK 2026: How a FIC Works, IHT Treatment of FIC Shares, BPR After FA 2026, Gift with Reservation Risks, and FIC vs Discretionary Trust
A FIC freezes the founders' estate at preference share value while future growth accrues to the children's ordinary shares — with no PET, no CLT, and no 7-year clock. But BPR on FIC shares requires trading, and gift with reservation is a real risk.
FIC = Value Freeze: Founders Hold Fixed-Value Preference Shares; Growth Goes to Children's Ordinary Shares With No IHT Entry Charge
Unlike a discretionary trust (which triggers a CLT at entry — 20% IHT on value above £325k), a properly structured FIC does not trigger an IHT charge when founded. The founders subscribe for preference shares at full value; the children subscribe for ordinary shares at nominal value. As the FIC grows: the growth belongs to the ordinary shareholders (children) from the outset — never in the founders' estate. No 10-yr periodic charges. No exit charges. But: Corporation Tax applies to FIC income; GWR risk if founders retain benefit; BPR unlikely for investment-only FICs.
| Aspect | Detail | Example / Application | Planning Guidance |
|---|---|---|---|
| FIC structure and IHT mechanism | HOW A FIC REDUCES THE FOUNDERS' IHT ESTATE: the FIC mechanism is a 'value freeze' — the founders' economic interest is fixed at the preference share value; all FUTURE growth accrues to the ordinary shareholders (children). The founders' IHT estate includes the preference shares at their fixed value; NOT the growth above that value. SHARE CLASSES: (1) PREFERENCE SHARES (founders): typically: redeemable at £1 per share (or at the value invested); cumulative 0.001% or similar nominal dividend (to preserve the preference without a significant income stream); full voting rights (A-class voting preference shares). The founders hold preference shares equal to the amount they invested in the FIC. (2) ORDINARY SHARES (children): B-class ordinary shares subscribed at nominal value (1p each). These carry the right to all capital and income ABOVE the preference share entitlement. At formation, if the only assets in the FIC are the amount equal to the preference share value: the ordinary shares are worth their nominal value (1p each). As the FIC grows: the ordinary shares capture the growth. (3) MULTIPLE CLASSES: many FICs use 4-8 share classes to give flexibility over dividends and capital allocation between different family members. FUNDING THE FIC: the founders fund the FIC by: (a) subscribing for preference shares at full value (founders invest £X; receive preference shares worth £X); OR (b) lending money to the FIC (a loan from the founders to the FIC — which is repayable; remains in the founders' estate as a loan asset but not in the FIC equity). The FIC then invests the funds received from the founders. | WORKED EXAMPLE — BASIC FIC STRUCTURE: Founders (Mr and Mrs A): each subscribes for 1,000 preference A shares at £100 per share. Total investment: £200,000 (Mr A: £100k; Mrs A: £100k). Children (2): each subscribes for 5,000 ordinary B shares at 1p = £50 each. Total ordinary share capital: £100. FIC total investment: £200,000 + £100 = £200,100. As the FIC grows over 20yr at 7% pa: the FIC is worth £775,000 at year 20. MR A'S IHT ESTATE at year 20: £100,000 (preference shares — fixed at subscription value). MRS A'S IHT ESTATE at year 20: £100,000 (preference shares). CHILDREN'S COMBINED VALUE at year 20: £775,000 − £200,000 = £575,000 (ordinary shares capturing all growth above preference). TOTAL FAMILY IHT ESTATE in founders' hands: £200,000 (just the preference shares). WITHOUT FIC: founders' estate would include the full £775,000 of family wealth. IHT SAVING: the founders' estate is reduced by £575,000 — the growth that has accrued to the children. There is no PET, no CLT, no 7yr clock on this transfer of value — because the children owned the ordinary shares from the outset (they subscribed for them at a proper price at formation). | IS THE FIC MECHANISM A GIFT? HMRC'S VIEW: when the children subscribe for ordinary shares at nominal value at formation: is this a gift from the founders to the children? ANSWER: no — not at formation. At formation, the ordinary shares have a nominal value because the FIC has not yet generated growth above the preference share value (the FIC's assets = preference share value; the ordinary shares have no value above that). The children pay proper consideration for their ordinary shares at the time they subscribe. No gift. AS THE FIC GROWS: the growth in the ordinary share value is not a gift from the founders to the children — it is the natural result of the ordinary shareholders (the children) holding the residual economic interest. The founders never had and never transferred the growth — it always belonged to the ordinary shares (the children's shares). ASSOCIATED OPERATIONS RISK: HMRC may argue that the structure as a whole (creating the FIC; issuing preference shares to founders; issuing ordinary shares to children; funding the FIC) constitutes a series of 'associated operations' (s268 IHTA 1984) designed to achieve the effect of a transfer of value. HMRC has challenged some FIC structures on associated operations grounds — specialist legal advice is essential before implementing a FIC. |
| IHT treatment of FIC shares — do they qualify for BPR? | BPR ON FIC SHARES — THE KEY QUESTION: the founders' preference shares are in their IHT estate. Do they qualify for Business Property Relief (BPR — s105 IHTA 1984)? If yes: BPR reduces the value of the preference shares to nil (100% BPR for qualifying unquoted business property). IF BPR APPLIES: the founders' estate includes the preference shares at full value BUT BPR reduces the taxable value to nil. IHT = nil on the preference shares. THE BPR TEST FOR FIC SHARES: BPR applies to unquoted shares in a company (s105(1)(bb) IHTA) — but NOT if the company: (a) is mainly an investment holding company (s105(3) IHTA — 'a business which consists wholly or mainly of...making or holding investments'). (b) A FIC that MAINLY holds investments (listed shares, bonds, cash, investment property) = a holding company making or holding investments = NOT qualifying for BPR. A purely investment FIC: NO BPR. (c) A company that WHOLLY OR MAINLY trades (generates at least 50%+ of its activity, profits, or assets from trading rather than investment): may qualify for BPR. A mixed FIC with some trading subsidiaries: may qualify if the trading activity is the predominant activity. HMRC's test: the 'wholly or mainly' test. For a typical FIC holding shares in an investment portfolio and some property: NO BPR (investment company). | FINANCE ACT 2026 — £1M COMBINED APR/BPR CAP: from 6 April 2026, BPR on qualifying assets (and APR on agricultural property) is capped: the first £1m of qualifying property receives 100% BPR; qualifying property above £1m receives only 50% BPR (not 100%). This means: even if the FIC preference shares DO qualify for BPR (e.g., the FIC has significant trading operations): BPR on the preference shares above £1m is only 50%. A founder with £2m of FIC preference shares qualifying for BPR: first £1m = 100% BPR (nil IHT); second £1m = 50% BPR (effective IHT: 40% × £500k = £200k). CHILDREN'S ORDINARY SHARES AND BPR: the children's ordinary shares in the FIC are also unquoted shares. If the FIC qualifies for BPR (trading): the children's ordinary shares also qualify for BPR (after 2yr holding). The children hold the ordinary shares from the outset — the 2yr qualifying period starts from when the FIC is established. As the ordinary shares grow: if the FIC qualifies for BPR, the children hold BPR-qualifying assets that grow free of IHT. | PLANNING FOR BPR ON A FIC: (1) TRADING ACTIVITY: if the founders want BPR on their FIC shares: the FIC needs to be a TRADING company (not mainly an investment company). This could mean: holding stakes in trading businesses; managing a trading group; deriving income mainly from trading rather than investment. The FIC must genuinely trade — cosmetic trading activities added to an investment FIC will not satisfy the 'wholly or mainly trading' test. (2) 2-YEAR HOLDING PERIOD: BPR requires the qualifying business property to have been owned for at least 2yr before death. Preference shares in the FIC: the founders must hold them for at least 2yr. (3) MIXED FIC: a FIC that holds both trading subsidiaries and investment assets. The 'wholly or mainly' test is applied to the WHOLE company (consolidated basis). If more than 50% of the company's activities (by reference to assets, profits, and activities) relate to trading: BPR may apply. If the investment element is larger: no BPR. Specialist tax advice needed to assess the trading/investment split. (4) FA 2026 IMPACT: the £1m combined APR+BPR cap significantly limits BPR for larger FICs. Founders with preference shares worth more than £1m qualifying for BPR: the cap limits full 100% BPR to the first £1m. Plan accordingly. |
| Gift with reservation (GWR) risks for the FIC founders | GIFT WITH RESERVATION — FA 1986 s102: a gift is made with a reservation of benefit where: (a) property is given away (gifted); and (b) the donor retains or is able to enjoy a benefit from the gifted property. If a GWR applies: the gifted property is treated as remaining in the donor's estate for IHT (at the date of death value, not the date of gift value). FIC AND GWR RISK: the founders of a FIC retain voting control via their preference shares. If the founders' control of the FIC means they can DIRECT how the FIC's assets are managed (including assets that ultimately belong to the children's ordinary shares): HMRC may argue the founders have 'reserved a benefit' in the gifted property (the children's ordinary shares / the growth in the FIC). IS THE FIC A GWR STRUCTURE? THIS IS THE KEY DEBATE: (a) FOUNDERS' ARGUMENT: no gift was made. The founders subscribed for preference shares (full consideration). The children subscribed for ordinary shares (full consideration at nominal value). There is no 'gift' to which GWR can attach. (b) HMRC'S ARGUMENT: the associated operations (s268 IHTA) or the overall arrangement was designed to confer a benefit on the children (via the ordinary shares) while the founders retained an enjoyment of the FIC's assets through their voting control and management rights. | WHAT CONSTITUTES A GWR IN A FIC CONTEXT: HMRC's GWR challenge is most likely where: (1) The founders retain the right to manage and invest the FIC's assets at will (via their voting and management power). (2) The founders can vote to pay themselves dividends from the FIC (paying preference dividends; or using their voting rights to direct the board). (3) The founders live in a property owned by the FIC (using an FIC asset personally — a clear GWR). (4) The founders derive ongoing economic benefits from the FIC beyond the preference return. HOW TO MANAGE THE GWR RISK IN A FIC: (1) INDEPENDENT BOARD: appoint non-family independent directors to the FIC board. The founders should not have sole control over investment decisions. (2) FORMAL INVESTMENT POLICY: the FIC should have a formal, written investment policy that the founders do not unilaterally control. (3) PREFERENCE DIVIDEND ONLY: founders should receive ONLY the preference dividend (or redemption value). No additional benefits from the FIC assets. (4) NO PERSONAL USE OF FIC ASSETS: the founders must not personally use or benefit from assets owned by the FIC (property, cars, etc.). Any personal use of FIC assets = clear GWR. (5) DOCUMENT THE SHARE SUBSCRIPTION: ensure the children's subscription for ordinary shares at formation is documented at an appropriate price (supported by a share valuation). (6) DO NOT USE THE FIC AS A VEHICLE FOR INCOME THAT BENEFITS THE FOUNDERS DISPROPORTIONATELY. | PRE-OWNED ASSETS TAX (POAT — FA 2004 s84): if a GWR is avoided (the founders genuinely give up the asset and receive only the preference return), HMRC may instead impose the Pre-Owned Assets Tax (POAT). POAT applies where a person previously owned an asset (or provided funds to acquire it) and the donor (or their spouse) currently uses or enjoys that asset. POAT is an INCOME TAX charge on the annual benefit of using/enjoying the formerly-owned asset (not IHT). Where HMRC argues POAT rather than GWR: the asset is NOT in the estate for IHT (GWR did not apply); instead the founder pays income tax on the annual benefit of the notional enjoyment. If the founder elects for the GWR rules to apply instead of POAT: the asset IS in the estate for IHT. For FICs: POAT is unlikely to apply (the founders do not use or occupy the FIC's underlying assets — they are investment assets; unless the FIC owns a property the founders use). SEEK SPECIALIST ADVICE: the GWR/POAT risk for FICs is real and depends on the specific facts of the FIC structure, the degree of control retained by the founders, and how the FIC is managed. A specialist IHT and corporate solicitor/tax adviser should review the FIC structure before implementation. |
| FIC vs discretionary trust — which is better for IHT? | FIC VS DISCRETIONARY TRUST — THE COMPARISON: both structures are commonly used for multigenerational IHT planning. DISCRETIONARY TRUST: (1) IHT on entry (CLT): transferring assets into a discretionary trust is a CLT (immediately chargeable to IHT at 20% on value above the available NRB). The 7yr clock starts. (2) 10-yr periodic charge (s64 IHTA): max 6% per 10yr cycle on the trust fund above the NRB. (3) Exit charges (s65 IHTA): charges on distributions from the trust. (4) FLEXIBLE: full discretion over beneficiaries and distributions; can be changed over time. (5) ASSET PROTECTION: trust assets protected from beneficiaries' creditors; divorce; personal insolvency. (6) HMRC TRANSPARENCY: trusts are registered with HMRC TRS; subject to trust tax rules (45% income tax on trust income above £1k standard rate band; CGT within the trust at 20/24%). FIC: (1) NO IMMEDIATE IHT (IN THEORY): founding a FIC and issuing ordinary shares to children is NOT a CLT (if properly structured). No immediate IHT charge. (2) NO 10-YR CHARGES OR EXIT CHARGES: the FIC is a company — not a settlement. No relevant property regime applies to the FIC (no 10-yr periodic charge; no exit charges on company dividends). (3) CORPORATION TAX: the FIC pays corporation tax on its income (currently 25% for profits above £250k; 19% for profits below £50k; marginal rate between). Lower tax on retained investment income than a trust (trust income taxed at 45% vs company at 25%). (4) CONTROL: founders retain control via preference shares and directorship. (5) COMPANY LAW: the FIC is subject to Companies Act 2006 requirements — annual accounts; confirmation statement; Companies House filings; possible audit requirements. (6) EXIT FROM COMPANY: extracting money from the FIC (dividends; salary; loan repayment) has income tax consequences for the recipients. Trust distributions are free of income tax for the beneficiaries (though the trust has paid income tax internally at the trust rate). | IHT-SPECIFIC COMPARISON — WHEN EACH WINS: TRUST WINS FOR IHT IF: (a) The settlor wants to transfer existing assets into a trust below the NRB (£325k): no entry IHT charge; no 10-yr charges; no exit charges. Simple discretionary trust below NRB. (b) The trust assets are business property qualifying for BPR: BPR available on CLT and at 10-yr charge (no periodic charge on BPR value). (c) The settlor is in poor health (surviving 7yr of a CLT is uncertain): a trust at least removes the assets from the estate now (even if the CLT is chargeable). (d) The estate is modest (below £1m): a simple NRB discretionary trust works well. FIC WINS FOR IHT IF: (a) The founders want to transfer VALUE ABOVE £325k without an immediate IHT charge: the FIC avoids the CLT entry charge (no CLT at formation if properly structured). A trust would face a 20% entry charge on value above £325k. (b) The FIC qualifies for BPR (trading): the founders' preference shares attract 100% BPR (up to £1m — FA 2026 cap). Combined benefit: no entry IHT + BPR on preference shares = highly effective IHT mitigation. (c) The founders want CONTROL: the FIC allows the founders to maintain voting control indefinitely (via preference shares). In a trust: the trustees (not the settlor) control distributions. | PRACTICAL CHOICE BETWEEN FIC AND TRUST: (1) LARGE ESTATES (£2m+): a FIC is often more efficient for estates above the NRB threshold where the founders want to transfer significant value without a CLT entry charge. The FIC is also more tax-efficient for retained investment income (corporation tax at 25% vs trust rate at 45%). (2) SMALL ESTATES (under £1m): a simple discretionary trust below the NRB (nil 10-yr charges; nil exit charges) is simpler and cheaper to administer than a FIC. (3) ASSET TYPE: illiquid assets (property; unlisted shares) are easier to put into a trust (no SDLT on property into trust if no consideration). A FIC may require SDLT on property transfer (if the company issues shares in exchange for property = transfer at value; SDLT applies on market value). (4) PROFESSIONAL COSTS: FICs are more complex to set up and administer (company law obligations; accounts; CT returns; shareholders' agreements) than a simple discretionary trust. (5) COMBINED USE: many sophisticated estate plans use BOTH — a FIC for large wealth (trading or qualifying business); a discretionary trust for the NRB amount; life insurance trusts to cover the residual IHT liability. Specialist IHT solicitor + corporate tax adviser needed to choose and implement the right structure. |
| HMRC scrutiny of FICs — the 2019 report and ongoing developments | HMRC OTS REVIEW AND HMRC'S 2019 FIC STUDY: in 2019, HMRC published an internal 'Inheritance Tax Review — Family Investment Companies' (the 'FIC Study'). The study was initiated because HMRC was concerned about the increasing use of FICs for IHT mitigation. Key findings: (1) FICs were growing rapidly in use — HMRC estimated hundreds of new FICs were being established each year for IHT purposes. (2) HMRC noted significant variation in the quality of advice given to FIC founders — some FICs were poorly structured (GWR risks; IHT on entry charges due to associated operations). (3) HMRC identified several areas of risk: associated operations (s268 IHTA); GWR (FA 1986 s102); GAAR (if the FIC was structured in a way that was abusive). CURRENT HMRC POSITION: HMRC has NOT introduced specific anti-FIC legislation (as of 2026). FICs are NOT illegal; they are not targeted by specific IHT anti-avoidance provisions. BUT: (a) GAAR applies to any arrangement that is 'abusive' — an aggressive FIC structure that produces results inconsistent with IHT legislation may be challenged under GAAR. (b) Associated operations (s268 IHTA): HMRC may argue the series of transactions (creating FIC; issuing shares; funding; investing) constitutes associated operations that together amount to a transfer of value. (c) GWR (s102 FA 1986): if the founders retain benefit from the FIC assets beyond the preference return. | WHAT HMRC LOOKS FOR IN A FIC ENQUIRY: (1) Whether the founders retained a benefit from the FIC's assets (GWR risk). (2) Whether the ordinary shares subscribed for by the children had any value above nominal at the date of subscription (if so: a gift of the difference). (3) Whether the funding of the FIC was itself a transfer of value (e.g., if the founders exchanged cash for preference shares worth LESS than the cash paid — the shortfall = a PET). (4) Whether the FIC is genuinely being run as a company (with board meetings; proper accounts; dividends properly declared). (5) Whether any property owned by the FIC is used by the founders personally (GWR/POAT risk). BEST PRACTICE TO SURVIVE AN HMRC ENQUIRY INTO A FIC: (1) Get a professional valuation of the FIC shares at formation (to demonstrate the ordinary shares were subscribed at the correct value). (2) Hold regular board meetings; keep proper minutes; file annual accounts; use an independent accountant. (3) Do not use FIC assets for personal benefit (GWR risk). (4) Keep copies of all shareholder agreements and subscription documents. (5) File a DOTAS disclosure if the FIC arrangement falls within a relevant hallmark (DOTAS — Disclosure of Tax Avoidance Schemes — Finance Act 2004: arrangements with a main benefit of obtaining a tax advantage and that meet a hallmark must be disclosed to HMRC within specified timescales). | DOTAS AND FICs: a FIC may constitute a 'notifiable arrangement' under the Disclosure of Tax Avoidance Schemes (DOTAS) rules if it meets a hallmark for IHT — specifically the 'IHT hallmark' (Finance Act 2004 s313; SI 2004/1864). The IHT hallmark is met where: the arrangement enables a person to obtain an IHT advantage; and a main benefit (not just a benefit) is to obtain the IHT advantage. Most straightforward FICs do NOT need to be disclosed under DOTAS (they are not abusive; they have genuine commercial purpose; they are widely known structures). But aggressive FIC structures (e.g., designed solely for IHT with no business purpose) may require DOTAS disclosure. SEEK SPECIALIST ADVICE: the decision on whether to disclose to HMRC under DOTAS is complex. Always consult a specialist tax solicitor or accountant before setting up a FIC. COST-BENEFIT ANALYSIS: FICs are expensive to set up (specialist legal and tax advice; share valuation; company formation; shareholders' agreement) and to administer (annual accounts; CT returns; company secretarial). For the IHT savings to justify the cost: the estate must be large enough that the expected IHT saving materially exceeds the setup and ongoing professional costs. A rough guide: FICs are generally worthwhile for estates above £2-3m where the founders have a reasonable life expectancy (to allow the value freeze to work). |
Family Investment Companies and IHT UK 2026. IHTA 1984 s5: estate = aggregate of all property to which the person is beneficially entitled. Preference shares = in estate at value. Ordinary shares held by children = in children's estates (not the founders' estate). s3(1) IHTA 1984: transfer of value = a disposition by a person as a result of which the value of their estate immediately after the disposition is less than it would be but for the disposition. At FIC formation: founders exchange cash for preference shares at full value — no diminution in estate = no transfer of value. Children subscribe for ordinary shares at nominal value (which is the full value of the ordinary shares at that point if the preference shares absorb all the initial FIC value) — no transfer of value to the children at formation. s105(1)(bb) IHTA 1984: BPR on unquoted shares in a qualifying company (company that is not mainly investment). s105(3) IHTA: the investment company exclusion — no BPR if the company 'consists wholly or mainly of making or holding investments'. Case law on 'wholly or mainly' investment: HMRC v Executors of Steadman (2002) — the Tribunal looked at the character of the company's activities. The 'wholly or mainly' test: if 50%+ of the company's income, assets, and activities derive from investment: no BPR. Finance Act 2026 (BPR cap): from 6 April 2026 — combined APR+BPR relief limited to £1m at 100% (full relief); value above £1m: 50% relief only. Finance Act 1986 s102: Gift with Reservation of Benefit (GWR). A disposition is a GWR if: (a) property subject to a reservation is given; (b) the donor does NOT enjoy the use of the property to the entire exclusion of the donee; OR (c) the donor is not entirely excluded from enjoying the gifted property. s102(3) FA 1986: if GWR applies, the property is treated as part of the estate immediately before death (at death-date value, not gift-date value). Pre-Owned Assets Tax (POAT): Finance Act 2004 s84 and Schedule 15. POAT applies where a person formerly owned an asset (or provided funds to acquire it) and currently enjoys the asset or occupation of land that formerly belonged to them (or that was funded by them). POAT charges income tax on the annual benefit of that occupation/enjoyment. The taxpayer may elect for GWR to apply instead (Sch 15 FA 2004 para 21 — election to be taxed under IHT GWR rather than POAT income tax). Disclosure of Tax Avoidance Schemes (DOTAS): Finance Act 2004 ss306-319; SI 2004/1864. The IHT hallmark: arrangements that enable a person to obtain an IHT advantage and a main benefit is to obtain that advantage must be disclosed. HMRC FIC Study (2019): HMRC published an internal review of Family Investment Companies. The study was presented to the then Financial Secretary to the Treasury. Key findings: 462 FICs were identified in HMRC's data as at the review date; HMRC estimated the total assets in FICs was significant; HMRC identified GWR, associated operations, and GAAR as potential challenges. No new anti-FIC legislation was announced following the study. Associated Operations: s268 IHTA 1984 — associated operations are treated as one overall transaction for IHT. If the FIC formation, share issue, and funding are associated operations: HMRC can look through the individual steps to determine if there is a composite transfer of value. Companies Act 2006: company law requirements for a private limited company — annual accounts (for FICs above the small company threshold: directors' report, balance sheet, P&L); annual confirmation statement; Companies House registration; possible statutory audit. Corporation Tax: FA 2004 onwards; corporation tax on company profits. Main rate: 25% (from April 2023 for profits above £250k). Small profits rate: 19% for profits below £50k. Marginal relief: for profits between £50k-£250k. FIC corporation tax on investment income: 25% for larger FICs vs trust income tax at 45% — FIC is more tax-efficient for accumulation of investment income.
Frequently Asked Questions
What is a Family Investment Company (FIC) and how does it work for IHT?
A Family Investment Company (FIC) is a private limited company structured with different share classes to allow the founding generation to retain control while transferring economic growth to the next generation without making a taxable gift. Founders typically hold preference shares (fixed value; voting rights; redeemable at subscription price). Children/grandchildren hold ordinary shares (subscribed at nominal value at formation; capture all company value above the preference amount). As the FIC grows in value over time: the growth accrues to the ordinary shareholders (children) — NOT to the founders. The founders' IHT estate includes only their preference shares at the fixed value (not the growth). There is no PET, no CLT, and no 7yr clock because the children owned the ordinary shares from the outset at their proper value at subscription. The IHT saving: the founders' estate is frozen at the preference share value; the growth escapes their estate organically.
Do FIC shares qualify for Business Property Relief (BPR) for IHT?
Possibly — but only if the FIC is a TRADING company, not mainly an investment company. Under s105 IHTA 1984, BPR (100% relief) applies to unquoted shares in a qualifying business. But s105(3) IHTA excludes shares in a company whose business 'consists wholly or mainly of making or holding investments'. A typical FIC that holds a portfolio of listed shares, bonds, cash, or investment property is an investment company — NO BPR. A FIC that holds or controls trading businesses (and derives mainly trading income/activity) may qualify — but only if the trading element is the predominant part of the company's activities. Finance Act 2026: from 6 April 2026, the combined APR+BPR cap of £1m means even qualifying FIC shares above £1m in value only attract 50% BPR (not 100%). Specialist tax advice is needed to assess whether a specific FIC's activities meet the BPR qualifying test.
Is a FIC safer than a discretionary trust for IHT planning?
Different risks, different benefits. A FIC avoids the IHT entry charge that applies to a CLT into a discretionary trust (20% on value above the NRB). A FIC also avoids the 10-year periodic charges and exit charges of the relevant property regime. For large estates (above £2m): a FIC is often more IHT-efficient than a trust for transferring value above the NRB. However: a FIC has Gift with Reservation (GWR) risks if the founders retain benefit from FIC assets (FA 1986 s102 — the asset stays in the estate if GWR applies). A trust with a proper CLT is more established and predictable for HMRC. The optimal structure depends on the estate size, asset type, founders' control preferences, and BPR availability. Many estates use both — a FIC for large wealth; a discretionary trust for the NRB amount.
What are the gift with reservation risks of a FIC?
A Gift with Reservation (GWR — FA 1986 s102) arises where a donor gives away property but retains a benefit from it. The gifted property stays in the estate for IHT. FIC GWR risk: if the founders retain voting control of the FIC (via preference shares with voting rights), HMRC may argue the founders enjoy a benefit from the 'gifted' property (the ordinary shares held by the children). The risk is highest where: founders make all investment decisions; founders receive ongoing economic benefits from FIC assets beyond the preference return; founders personally use FIC assets (e.g., a property owned by the FIC); the ordinary shares were issued at an inappropriate low price at formation. Mitigation: independent directors; formal investment policy; founders receive only the preference dividend; no personal use of FIC assets; proper valuation of ordinary shares at subscription.
What is the difference between a FIC and a discretionary trust for IHT?
Key differences: (1) ENTRY CHARGE: a gift into a discretionary trust is a CLT — 20% IHT on value above the NRB (£325k) at entry. A FIC (if properly structured): no CLT — the founders subscribe for preference shares at full value; children subscribe for ordinary shares at nominal value. No entry IHT charge (if no gift at formation). (2) 10-YEAR CHARGES: a discretionary trust is subject to the relevant property regime — 10-yr periodic charges (max 6%) and exit charges. A FIC is a company — no relevant property charges. (3) INCOME TAX: trust income taxed at 45% (trust rate above £1k). FIC income taxed at corporation tax (25% for large FICs). FIC is more tax-efficient for retained income. (4) CONTROL: trust: trustees control distributions; settlor cannot instruct trustees. FIC: founders control via preference shares (voting) and directorship. (5) COST: FIC has Companies Act obligations (annual accounts; CT returns; Companies House filings). Trusts have simpler ongoing admin (TRS; annual returns; trust accounts). (6) ADMINISTRATION: FIC requires a solicitors/accountants team familiar with company and tax law. Trusts are simpler for modest estates.
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