Using Trusts and Family Investment Companies for Property Inheritance Tax Planning

11 June 2026

Accounting & Compliance, Building a Business, Estate Planning / IHT, Probate, Property Investors & Developers, Property Owners, Reducing Tax

For many property investors, inheritance tax planning is not simply a question of passing assets to the next generation.

Rental properties often come with substantial capital gains, ongoing income requirements and complex family considerations.

As property values continue to rise and inheritance tax allowances remain frozen until at least April 2031, more landlords are exploring advanced succession planning strategies to preserve family wealth.

Two of the most commonly discussed solutions are trusts and Family Investment Companies (FICs). While neither is suitable in every situation, both can offer significant inheritance tax advantages when implemented correctly.

The Challenge of Passing Property to the Next Generation

Many landlords would like to transfer wealth during their lifetime rather than leaving everything through their estate on death.

However, a direct gift of a property can create two immediate tax issues:

Capital Gains Tax (CGT) may arise on the increase in value since acquisition.
Inheritance Tax (IHT) considerations need to be carefully managed.

For long-term property owners, the potential CGT bill can often be the biggest obstacle to making lifetime gifts.

This is where trusts can sometimes provide an effective solution.

Using Trusts to Defer Capital Gains Tax

A trust can be used to facilitate the transfer of property between generations while potentially avoiding an immediate CGT charge.

The property is transferred into a trust established for the benefit of family members.

In most cases, the person making the gift should not remain a beneficiary if inheritance tax planning is one of the primary objectives.

Because the transfer into trust is treated as a chargeable transfer for inheritance tax purposes, it may be possible to claim holdover relief for capital gains tax.

This means that:

No immediate CGT becomes payable.
The trust effectively inherits the property’s original base cost.
The capital gain is deferred until a future disposal takes place.

For many families, this allows succession planning to proceed without creating an immediate tax burden.

Understanding the Inheritance Tax Position

The inheritance tax treatment of transfers into trust depends on the value of the assets involved.

Where the value transferred falls within the available nil rate band, there may be no immediate inheritance tax liability.

However, where the value exceeds the available nil rate band, the excess can become subject to lifetime inheritance tax charges.

This can present challenges where properties have experienced significant growth in value over many years.

As property prices increase, it becomes increasingly difficult to transfer entire properties into trust without potentially triggering inheritance tax consequences.

Careful planning is therefore essential before implementing any trust strategy.

Trusts as a Long-Term Family Planning Tool

Many people view trusts purely as a mechanism for transferring assets.

However, they can also form part of a wider family wealth planning strategy.

Trusts can provide:

Asset protection for future generations.
Control over when and how beneficiaries receive assets.
Flexibility in family succession planning.
Potential inheritance tax advantages over the long term.

For families with children or grandchildren who may not yet be ready to manage significant assets, a trust structure can provide valuable oversight while preserving wealth for future generations.

Income Tax Opportunities Within Trusts

Trusts can also provide flexibility when dealing with rental income.

Although trust income is generally taxed at higher rates initially, distributions to beneficiaries may allow tax credits to be utilised by individuals who have lower tax rates or available personal allowances.

This can sometimes improve the overall family tax position, although each situation must be considered on its own merits.

As with all tax planning, commercial and family objectives should remain the primary consideration.

What Is a Family Investment Company?

A Family Investment Company (FIC) has become increasingly popular amongst property investors and higher-net-worth families.

Despite the name, there is no special type of company called a Family Investment Company.

It is simply a standard limited company designed and structured to facilitate long-term family wealth planning.

The principal objective is often to move future growth in value outside the older generation’s estate while allowing them to retain an appropriate level of control.

Incorporating Existing Property Portfolios

Where a property portfolio is already held personally, transferring those assets into a company requires careful consideration.

There are broadly two approaches.

Incorporation with Tax Relief

In certain circumstances, incorporation relief may be available.

Where a genuine property business exists and qualifying conditions are met, capital gains can potentially be deferred when the business is transferred into a company.

The availability of relief depends heavily on the facts of the case, including the extent of the owner’s involvement in managing the property business.

Professional advice is essential before relying on incorporation relief.

Incorporation Without Relief

Where incorporation relief is unavailable or unsuitable, some investors choose to transfer selected properties into a company and accept any resulting capital gains tax liability.

In these cases, a director’s loan account is often created reflecting the value transferred to the company.

This can provide future flexibility, allowing funds to be extracted from the company tax-efficiently or gifted as part of a wider inheritance tax strategy.

Stamp Duty Land Tax Considerations

One of the most important considerations when incorporating property portfolios is Stamp Duty Land Tax (SDLT).

In many cases, SDLT can arise when properties are transferred into a company, even where the transfer is between connected parties.

The cost can be substantial and should be modelled carefully before any restructuring takes place.

Certain reliefs may be available in specific circumstances, particularly where a genuine partnership structure exists before incorporation.

However, these rules are complex and subject to detailed conditions.

Obtaining specialist advice before proceeding is strongly recommended.

Financing and Mortgage Issues

Property investors should also remember that lenders must usually approve any transfer of mortgaged properties into a company structure.

In practice, refinancing is often required.

This can create additional legal, valuation and arrangement costs which need to be factored into the overall planning exercise.

Structuring Ownership for Future Generations

One of the most attractive features of a Family Investment Company is the flexibility of its share structure.

Many families use different classes of shares to separate current value from future growth.

A commonly used approach involves:

Shares held by the parents that preserve existing value.
Growth shares issued to children or future generations.
Trust ownership in certain circumstances where additional protection or flexibility is required.

This allows future increases in value to accrue primarily to the next generation while the founders retain strategic control.

Unlike potentially exempt transfers, there is no seven-year waiting period before future growth falls outside the founders’ estates.

Taxation of Rental Income Within a Family Investment Company

Rental profits generated by company-owned properties are generally subject to corporation tax.

For some investors, this can create a lower immediate tax burden compared to holding properties personally, particularly where profits are retained within the company for reinvestment.

However, extracting funds from the company requires further tax planning and should always be considered as part of the overall strategy.

Flexible Income Distribution

A Family Investment Company can also provide flexibility when distributing profits among family members.

Different share classes may allow dividends to be paid to different shareholders, helping families align income distributions with individual tax positions.

Where implemented correctly, this can create opportunities to improve overall tax efficiency across multiple generations.

Any structure must be carefully designed to ensure it reflects genuine commercial objectives and complies with relevant tax legislation.

Are There Any Downsides?

While trusts and Family Investment Companies can be extremely effective planning tools, they are not suitable for everyone.

Potential drawbacks include:

Professional fees.
Ongoing administration requirements.
Additional compliance obligations.
Potential SDLT costs.
Financing complications.
Complexity compared with direct ownership.

The right solution will depend on the size of the portfolio, family objectives, income requirements and long-term succession plans.

Taking Professional Advice

Advanced inheritance tax planning should never be approached as a one-size-fits-all exercise.

Trusts and Family Investment Companies can provide significant benefits, but they require careful implementation to ensure that tax, legal and practical considerations are aligned.

A thorough review of your property portfolio, family circumstances and long-term objectives is essential before deciding on the most appropriate structure.

Get in touch

If you are considering succession planning for a property portfolio, our specialist tax advisers can help you evaluate the available options and develop a strategy tailored to your circumstances..

Call us on 01634 731 390 or complete our ‘Take the Next Step’ form to discuss how we can help you plan ahead.