Estate Freezing for IHT Planning: FICs, Loan Trusts, and Preference Shares

Inheritance tax planning often focuses on transferring value out of an estate. But for many HNW individuals, outright gifts are unattractive — you may need the income, be reluctant to give up control, or face CGT on a disposal. Estate freezing offers an alternative: you retain the current value of an asset within your estate, but all future growth accrues outside it.

Done well, estate freezing can be highly effective. Done poorly, it attracts HMRC scrutiny and may create unexpected charges. This guide explains the principal techniques and their trade-offs.

The Core Concept

The logic of an estate freeze is simple. Suppose you own an investment portfolio today worth £2m. In 20 years, it might be worth £5m. IHT at 40% would cost your estate £2m on the additional £3m of growth.

If you could fix your estate value at £2m today — and ensure the future growth of £3m sits entirely outside your estate — you would save £1.2m in IHT (on the growth element alone).

Estate freezing achieves this by structuring ownership so that:

• You (or your estate) retains an interest worth the current value — frozen;
• Others (typically children or a trust for their benefit) hold interests that capture all future growth.

Technique 1: Family Investment Companies (FICs)

A Family Investment Company is a private limited company used as a family wealth vehicle. The typical structure works as follows:

Share structure:

• Parents subscribe for preference shares which carry fixed economic rights — for example, a cumulative preference dividend and priority on a return of capital equal to the subscription price. These shares have a defined, fixed value.
• Children (or a trust for their benefit) subscribe for ordinary shares at a nominal price — typically £1 or £100 in total.

How the freeze works:

• The parent contributes, say, £2m of investments into the company (normally via a loan or subscription for preference shares with a value of £2m).
• The preference shares are worth £2m — no more and no less.
• All growth in the company's investments accrues to the ordinary shares held by the children.
• When the parent dies, the preference shares are in their estate at fixed value (£2m), not at the grown value.

Tax advantages of a FIC:

• Investment income in the company is taxed at 19-25% corporation tax, compared with up to 45% income tax for an individual.
• Capital gains in the company are taxed at 19-25% corporate rates, versus 18-24% personal CGT rates (the saving is less dramatic for gains than for income).
• Dividends between UK companies are generally exempt from corporation tax (the dividend exemption under CTA 2009).
• The parent retains control as a director and through the articles, despite holding only preference shares.

IHT treatment of FIC shares:

• Critically, shares in an investment company do not qualify for Business Property Relief (BPR), because BPR requires a trading company. A FIC is an investment vehicle.
• This means that on the parent's death, the preference shares are in the estate at full value — but that full value has been frozen.
• The children's ordinary shares, having grown from near-zero to (say) £3m of growth, are outside the parent's estate.

HMRC scrutiny: FICs are not targeted by specific anti-avoidance legislation, but HMRC is aware of their use and has published guidance noting that it monitors structures where IHT benefits are the primary driver. Any FIC must be structured with genuine commercial substance. Where arrangements are contrived — for example, artificial values attributed to preference shares — HMRC may challenge under the General Anti-Abuse Rule (GAAR) or specific statutory provisions. Structures that are marketed as tax schemes may also fall within the Disclosure of Tax Avoidance Schemes (DOTAS) regime.

Comparison with discretionary trusts:

• A gift into a discretionary trust is a Chargeable Lifetime Transfer (CLT) — immediately chargeable at 20% above the nil-rate band, plus ten-year anniversary charges of up to 6%.
• A FIC subscription by a child at full consideration is not a gift at all.
• However, FIC shares representing near-zero value may still be challenged if the arrangement lacks genuine commercial basis.

Technique 2: Loan Trusts

A loan trust is simpler in concept and execution. The mechanics are:

1. You (the settlor/lender) lend a sum of money to a trust on interest-free (or commercial) terms. The loan is repayable on demand and represents a debt in your estate.
2. The trustees invest the loan proceeds.
3. The loan itself (the outstanding balance) remains in your estate — it is a debt owed to you.
4. All growth above the loan balance accrues to the trust — outside your estate.

Why this achieves a freeze: The loan is fixed in nominal terms. If you lend £2m and the trust fund grows to £5m, your estate contains the £2m loan (a debt), and the trust holds £5m — but the trust's £5m is your potential beneficiaries' money, not yours. The £3m of growth has "escaped" your estate without any gift.

No PET or CLT: Because the initial transfer is a loan, not a gift, there is no potentially exempt transfer and no chargeable lifetime transfer. There is no seven-year clock.

Repayment: You can request repayment of the loan at any time, which provides some flexibility if you need capital. However, repayments from the trust come back into your estate, potentially inflating it.

Trust structure: The trust associated with a loan trust is typically a discretionary trust. Trustees hold the investment growth for a class of beneficiaries (usually children and grandchildren). The trust does not incur the ten-year charge on the loan element (since that is a creditor, not trust property) — only on the growth element above the loan balance.

Compound the freeze: Over time, as the trust fund grows and you draw down loan repayments (and spend the proceeds), both the loan balance and your estate shrink — accelerating the freeze effect.

Technique 3: Preference Shares in a Business

For business owners, the estate freeze can be achieved through the share structure of an operating company. The basic mechanism mirrors the FIC, but within a trading company:

• Existing shareholders convert ordinary shares into redeemable preference shares with a fixed value (equal to today's valuation).
• New ordinary shares are created and held by children or a family trust.
• The business grows — all growth accrues to the ordinary shareholders.
• The preference shares remain at fixed value in the parent's estate.

Interaction with BPR: If the trading company qualifies for Business Property Relief, the preference shares in the estate may qualify for 100% relief — meaning they are both frozen in value and potentially exempt from IHT. This is very attractive. However, the BPR reforms from April 2026 (a £2.5m per-estate cap on the 100% rate, with excess at 50% relief) will limit this benefit for larger estates. The cap was originally announced as £1m in the October 2024 Budget, then raised to £2.5m in December 2025, and is transferable between spouses and civil partners.

CGT on conversion: Converting ordinary shares to preference shares is a reorganisation for CGT purposes — generally no immediate CGT if conducted correctly under TCGA 1992, Chapter 2.

DOTAS and HMRC Risk

Some marketed estate-freezing schemes have been subjected to DOTAS hallmarks. The risk is higher where:

• The structure lacks any commercial substance beyond IHT saving;
• Values are artificial (especially preference shares valued at an arbitrary amount);
• The scheme was purchased as a package rather than designed by independent advisers.

The safest estate-freezing structures are those with genuine commercial rationale — a FIC that actually manages family investments efficiently, or a business reorganisation that also serves the succession planning needs of the business.

Comparing the Techniques

Feature	FIC	Loan Trust	Preference Shares (Trading Co.)
Immediate gift	No	No	No
Seven-year PET?	No	No	No
Income tax rate on income	19-25% corp tax	Trust rate	19-25% corp tax
BPR available?	No (investment co.)	No	Potentially yes (trading co.)
Control retained?	Yes	Limited	Yes
HMRC scrutiny	Medium	Low	Low-Medium
Complexity	High	Low	Medium

Key Considerations Before Proceeding

• Legal drafting: All three techniques require careful legal and tax advice. Particularly for FICs, the articles of association, share subscription agreements, and any loan documentation must be watertight.
• Valuation: For preference shares and FIC subscriptions, a proper commercial valuation is advisable to withstand challenge.
• Pre-existing assets: Transferring existing assets into a FIC or trust can trigger CGT and potentially SDLT (for property). The freeze works best when applied to cash or to new investment capital.
• Exit: Consider how the structure unwinds — either on the founder's death or on sale of the underlying investments. Exit costs can erode the IHT saving if not modelled carefully.

The value of investments may fall as well as rise. Tax laws and HMRC guidance change; this article reflects the position as of June 2026 and is not a substitute for personalised advice.

How Global Investments Can Help

Estate freezing is one of the more sophisticated areas of IHT planning, and the right structure depends heavily on the nature of your wealth, your family situation, and your tolerance for complexity and HMRC risk. Global Investments works with specialist tax counsel and accountants to design and implement estate-freezing strategies that are robust, commercially grounded, and tailored to your circumstances. We serve clients across the UK, Cyprus, UAE, and other jurisdictions. Contact us for a confidential conversation about your estate planning needs.