28/05/25
Trust Me, I’m A Company
Trusts in the UK can trace their origins all the way back to the feudal system, when ownership of land could be temporarily passed to the feudal overlord until the new owner took possession. They are still in use today, often for similar reasons.
For instance, a person who wants to pass an asset or wealth onto someone, but is worried that they will not look after it, may act irresponsibly or, due to age or illness, need help with decisions. By using a trust, they can ensure that both the asset or wealth and the beneficiary are protected. The person (the settlor) passes legal ownership of an asset to a third party (the trustee), and specifies who should benefit from the asset (the beneficiary), either the capital or the income it generates (or possibly both), and on what basis, if any, the beneficiary may take ownership of the asset. The trust is the legal relationship between the settlor, the trustee and the beneficiary.
Usually, the trust will be one of three types:
- Bare trust, where the trustee holds the asset as nominee for the beneficiary who can generally call for legal ownership to be formally transferred at any time. Bare trusts are effectively ignored for UK taxation, and following that logic, any references to trusts in the rest of this article are to the types below.
- Income in possession, where the beneficiary is entitled to the income of the trust as it arises, but not the capital. This could be due to another person, or to the income beneficiary at a later date.
- And discretionary, where the beneficiary is not entitled to a bean until the trustees make a distribution.
However, given the costs that can be associated with a trust, they are often used where significant sums are involved, and this can also lead to either a large tax bill or an equally large tax saving. It should, therefore, come as no surprise that the taxation of trusts, including the taxation of the settlors and beneficiaries, may have caused more House of Lords, now Supreme Court, decisions than any other area of taxation.
Trusts have also led to significant anti-avoidance legislation, because the interaction of trust and tax law has sometimes allowed for income and capital gains to be transferred along with the asset in a tax efficient manner; too efficient for the UK tax authority, now HM Revenue & Customs (HMRC) and the Government of the relevant day.
This could be why when HMRC sees a trust in any structure, their first thought is ‘what tax is being avoided here?’ To misquote the wonderful Mrs Merton, their question is “what first attracted you to the tax avoidance device of a trust?”
However, many trusts are not used for avoiding tax, and have other purposes, such as those mentioned above, regarding providing protection for both assets and beneficiaries, plus often confidentiality.
Do You Have Protection?
It is important to remember that no matter what HMRC may think of a subject, it is the Government that proposes laws and Parliament that passes them, before the Courts weigh in on how they are to be interpreted. This is highly relevant to trusts.
As noted above, trusts are the subject of many anti-avoidance rules that have been added or strengthened over the years. For example, with non-resident trusts, gains were originally only taxable when capital payments were made to the beneficiaries. This allowed a settlor to defer the taxation on gains by leaving them in a non-resident trust for an indefinite period. Therefore, starting in March 1991, the gains of new non-resident trusts with UK domiciled settlors became taxable on those settlors as they arose.
This rule was then tightened in 1999 by extending the rules to non-resident trusts whenever they were created, unless they came within classes of trusts that were “protected”. These were trusts that had certain characteristics that Parliament was not worried about, and didn’t want to be caught by a blanket anti-avoidance rule. For example, one class of trust “protected” from the rule was where the only potential or actual beneficiaries were the future spouse or minor or unborn children of the settlor.
These trusts remained protected unless they were tainted, which generally happens when new assets are placed into the trust. Once a trust is tainted, the relevant rule they were being protected from then applies to all assets and income of the trust.
The idea of protection and tainting for trusts is one that politicians seem to favour, as it allows them to both stop tax avoidance and also curry favour by excluding certain types of trusts or people from the rules. An example of this is when the UK’s deemed domiciled rules were extended in April 2017. Trusts settled by people who were not domiciled in the UK were often outside the UK’s rules, for example, the gain attribution rule mentioned above. However, if that settlor then became domiciled in the UK (which admittedly was a strange thing to do), the gains of their non-UK trusts were suddenly taxable upon them.
By introducing the deemed domicile rules for income tax and capital gains tax, a number of people would, at a stroke, find themselves now domiciled in the UK and their trusts within the UK’s anti-avoidance rules. Therefore, trusts of newly deemed domiciled residents were given protection from rules on income of trusts being attributed to settlors, the transfer of assets abroad rules (one of the UK’s main anti-avoidance rules relating to foreign income), and the capital gains rules mentioned above, provided the relevant income and gains remained within the trust. It is worth noting that these protections were not available to people who had regained their UK domicile under the 2017 changes rather than becoming deemed to be UK domiciled.
Now You See It, Now You Don’t
However, this idea of protection and tainting has built up a level of expectation with the public that has caused problems for the current UK Government. With the scrapping of the current domicile rules in favour of the idea of long-term residence, the previous Government announced that the, by now, usual protection would apply to existing trusts. However, in August 2024, the new Government said there would be no carve-out for existing trusts, and settlors would be caught as soon as they became subject to worldwide taxation by the UK.
The Near Identical Solution
As mentioned, HMRC really dislikes trusts, but there is a near identical alternative that they are completely happy with. Indeed, they had a special taskforce spend two years looking for a problem but announced they were happy the structure is not a tax avoidance vehicle.
This is the family investment company (FIC).
A FIC is not a magic beast that solves every tax problem, but it does avoid many of the tax problems of a trust, possibly replacing them with its own. However, as mentioned, a big plus is that HMRC will not be starting with the view that the FIC is a tax avoidance vehicle and looking to penalise it at every turn.
Generally, FICs can be set up to mimic trusts in many ways. For example, the directors carry out similar duties as discretionary trustees, eg by safeguarding the assets of the company and only distributing amounts they want to. However, the people who fund the FICs are not taxable upon its income and gains as they arise in the way settlors are with trusts, unless they are excluded from benefitting.
Who can benefit from the income and gains of a FIC? Protecting the assets from divorce or misuse can be dealt with by having different share classes and pre-emptive rights for disposals of shares, again mirroring similar aspects of trusts. The share classes can also be designed to allow for value to pass between generations in an inheritance tax efficient manner.
It may be possible to transfer assets to the FIC with any gains rolled over, and a significant benefit over trusts is that there is no immediate or continuing charge to inheritance tax when the FIC is set up.
Dividend income of the FIC will generally be exempt from tax, as may gains if used to hold a trading company or group that is later sold. For taxable income, the immediate tax charge is also lower, being 19 per cent to 25 per cent, rather than 45 per cent for discretionary trusts.
However, where a FIC loses out to a trust is that extracting money from the FIC will be taxed as a distribution, potentially leading to double taxation if the underlying income of the FIC was not exempt. Also, there may be less confidentiality with a FIC than a trust due to reporting requirements, but this difference is being eaten away with the rules for trusts moving towards those for companies.
Finally, from a UK point of view, a FIC incorporated here is routine, but they can be formed offshore. This will need careful thought and handling in order to keep the FIC itself out of the UK, and also outside the UK’s many anti-avoidance rules for foreign (to the UK) income and gains. However, a non-UK FIC may be a structure worth considering if an UHNWI is still thinking about moving to the UK.
Andrew Parkes
Andrew is the National Technical Director for Andersen in the UK. He specialises in international tax, including interpretation and application of Double Taxation Treaties.
