FICs and FLPs, rather than trusts? Alternative governance structures for passing generational wealth in the UK

For many high and ultra-high net worth families, the word ‘structure’ still instinctively means ‘trust’. Over the years, the tax benefits of onshore trusts have gradually been eroded. UK trusts now sit within a tightly defined inheritance tax (“IHT”) ‘relevant property regime’ that can impose entry, exit and ten-year anniversary charges. Combined with political scrutiny, increasingly onerous disclosure requirements, and the risks of further changes to the IHT regime, many families are rightly asking: what are the alternatives?

We highlight below a selection of alternatives to establishing a trust which, when properly utilised, can form an effective way of passing generational wealth in the UK. While trusts remain valuable structures for many families, they are now one option in a broader structuring landscape, rather than necessarily the ‘go to’.

1. Outright gifts

The simplest option is no structure at all: direct gifts to the next generation.

Lifetime gifts between individuals are not subject to IHT provided the donor survives the gift by 7 years (known as the “7 year rule”). If the donor survives for at least 3 years from the date of the gift but dies within 7 years, taper relief progressively reduces the rate of IHT down from 40% to zero, with each additional year that passes.

Outright gifting remains an effective way of passing wealth down generations, particularly when combined with other planning (such as with life insurance over the 7-year period or by putting in place a family constitution). The limitations, however, are obvious: outright gifts expose assets on divorce, to creditors, and to mismanagement by the recipient, and cannot be ‘recalled’ if family circumstances change. And fundamentally for business owners and founders, an outright gift without any structuring can lead to a loss of control over the assets or business for the donor.

2. Family Investment Companies (“FICs”)

A FIC is typically a UK limited liability company, funded by way of a loan by the senior generation. Through the use of different share classes, the senior generation can retain control (by holding voting shares and so controlling loan repayments), with younger generations holding non-voting shares. When properly utilised, these structures can be used to pass significant assets (and future growth) down generations without passing on control.

FICs benefit from corporation tax rates, rather than the historically higher rates of income tax, as well as an exemption from tax on dividends received in respect of underlying investments. Value can be ‘rolled up’ in the structure without being subject to income tax or capital gains tax in an individual’s hands. If cash or assets not standing at a gain are transferred into the company, there should be no tax on set up, though the eventual extraction of funds through dividends to shareholders can trigger tax.

IHT planning can be effected by gifting shares in the FIC. The value of the gifted shares will fall out of the donor’s estate for IHT purposes if they survive the gift by 7 years and the value of the retained shares can also benefit from discounting for fractional ownership. Unlike trusts, FICs do not suffer entry, exit or ten-year anniversary IHT charges simply by existing; the trade-off is increased corporate administration and compliance, and there is less flexibility than a trust affords to reallocate value among a class of beneficiaries.

3. Family Limited Partnerships (“FLPs”)

FLPs offer a useful alternative, particularly where shares are being transferred rather than cash. FLPs are often preferable to FICs where an individual wishes to pass wealth to future generations while continuing to receive profits on a regular basis.

An FLP involves a general partner – a corporate vehicle controlled by the senior generation – and limited partners, typically younger family members. The general partner retains all decision-making powers, while limited partners hold the economic value.

Gifting partnership interests in the FLP to the younger generation enables assets to pass without loss of control for the donor. The structure also offers flexibility, as new limited partners can be added as family circumstances evolve.

FLPs are tax transparent, so income and gains are taxed directly on partners as they arise – but with the advantage that there is no further taxation on extraction of value from the structure to limited partners. Like FICs, a gift of partnership interests will be subject to the ‘7 year rule’ but otherwise will pass free of IHT, and will not be subject to periodic IHT charges that apply to trusts.

4. Hybrid structures, combining features of FICs and FLPs, can also be appropriate for certain UHNW families, to manage income tax exposure and benefit from the dividend exemption without increasing the rate of CGT on gains.

The current landscape

Recent changes to the UK’s tax regime have caused HNW and UHNW individuals to refocus on how they can structure their assets to provide protection from future changes. In particular, drastic announcements in recent Budgets have created concerns about holding assets outright.  Owners of business assets which have until now qualified for 100% IHT Business Property Relief will be faced with IHT exposure from April 2026, if they do not take steps before then to make lifetime transfers of those businesses – whether structured to ensure governance and control, or not…

Against that backdrop, the most valuable feature of any structure is often optionality:

• the ability to adjust economic interests between branches of the family without triggering disproportionate tax charges; and
• the separation between control, legal ownership and economic benefit.

Trusts remain a sophisticated and, in many cases, indispensable part of this picture. But for many UHNW families, family investment companies and family limited partnerships now share the stage.

The art lies in selecting and, where necessary, combining structures to align with a particular family’s vision, values, risk appetite and jurisdictional footprint, while keeping a prudent eye on the evolving UK tax landscape. The structures may be technical but the objective is simple – to pass wealth securely from one generation to the next, with no more tax impact than the law requires.