Using Trusts In Succession

Succession is often spoken of as a single moment – the passing of the baton from one generation to the next. In reality, for family businesses it is much more complex, a process that spans years and demands foresight, negotiation, and a degree of humility. At the heart of this process lies a fundamental question: how do you preserve a business that carries both financial and emotional weight, while accommodating the shifting needs of a family whose members and priorities will inevitably change?

Trusts offer one answer to this question. They are not new, nor are they the only option available, but their enduring appeal lies in their ability to balance continuity with flexibility. By interposing trustees between the business and its beneficiaries, a trust ensures that ownership is not fragmented or destabilised by individual circumstances, but held in a way that preserves the business as a long-term asset for the family as a whole. This shift from personal ownership to collective stewardship is what makes trusts such powerful vehicles in the succession process.

The role of trusts

For many families, the greatest threat to succession is not external competition or even tax burdens, but what happens within the family itself. Divorce, creditor claims, disputes between siblings or cousins – all can disrupt ownership and undermine stability.

Once shares are in trust, they are no longer at the mercy of an individual’s personal circumstances. No single individual owns the shares outright, but rather the Trustees hold the business for the family collectively, with instructions that it is not to be divided up at the whim of events, making it harder for personal disputes to spill into corporate governance.

But protection is only one part of the story. There is also a governance benefit. Trustees, unlike family shareholders, are bound by fiduciary duties. Their responsibility is not to one person but to the beneficiaries as a group, across the generations. This is an important distinction. While individuals may be swayed by short-term financial needs or interpersonal conflicts, Trustees are charged with preserving the business’s value and direction over time.

The practical impact of this structure is significant. It prevents short-term pressures from pulling the business off course, and in a way, acts as some kind of ballast. It allows families to separate wealth from control, ensuring that younger or less experienced generations can benefit economically without immediately influencing strategic decision-making. At the same time, it creates space for those who are capable and committed to play a meaningful role in management, regardless of their precise shareholding.

Flexibility versus certainty

Of course, the effectiveness of a trust depends heavily on how it’s structured and who the Trustees are. Discretionary Trusts (often known as ‘Bloodline Trusts’)are often the more favoured model, precisely because they allow Trustees to adapt to changing circumstances. With no fixed entitlement, beneficiaries can’t treat the trust as an automatic source of wealth, and instead, distributions are made at the Trustees’ discretion, guided by Letters of Wishes and family constitutions. This flexibility is what enables a trust to respond to the shifting demands of both family and business life over time.

Yet, this kind of flexibility brings its own risks. Families generally want certainty, and assurances that one child will inherit control, or that the wealth will be distributed evenly. Trusts do not always sit comfortably with these instincts. If not carefully explained, discretionary powers can be perceived as unfair or arbitrary, particularly if some members feel excluded from decision-making. The very features that make trusts resilient, such as their capacity to adapt, can become sources of tension if governance and communication are not robust.

The tax dimension

For decades, one of the strongest arguments in favour of using trusts for family business succession has been their interaction with inheritance tax reliefs. Business Property Relief (BPR) and Agricultural Property Relief (APR) have traditionally allowed families to transfer significant business and farming interests without incurring an Inheritance Tax (IHT) charge that might otherwise force the break-up or sale of the enterprise.

That landscape, however, is beginning to change. From April 2026, both BPR and APR will be subject to new restrictions, with relief capped and reduced in ways that will matter to many business owners. For the first time, the scale of relief available will not be open-ended. Families relying on these reliefs will need to think carefully about whether their existing structures still achieve what they were designed to do.

The effect of these changes is twofold. First, they make early planning even more important: arrangements that once seemed generous may, in the coming years, leave parts of an estate exposed to tax in ways not previously anticipated. Second, they highlight the continuing value of trusts as flexible vehicles. While reliefs are becoming less predictable, a trust can provide a stable framework for ownership and succession, giving trustees the ability to adapt the family’s approach as rules and circumstances evolve.

What this means in practice is that succession planning can no longer be treated as a one-off exercise. Families who put structures in place even a few years ago will need to revisit them in light of the reforms. The coming changes do not diminish the usefulness of trusts, but they do make the advice that underpins them more critical. Professional input will be essential to ensure that trusts continue to deliver both protection and tax efficiency in the new environment.

Alternatives

It would be misleading to treat trusts as the only solution. Other models are gaining ground, reflecting changes both in tax policy and in how families think about the purpose of their businesses.

One of the most significant of these is the Employee Ownership Trust (EOT). Introduced in 2014, an EOT acquires a controlling interest in a company and holds it on behalf of its employees. Instead of shares being passed through family lines, ownership is transferred to the workforce collectively. Employees then share directly in the profits and often have a greater say in governance. For founders, EOTs can provide a dignified and values-driven exit while protecting the ethos of the business. For employees, they create loyalty and alignment. And there are tax incentives too: the transfer to an EOT  can benefit from Capital Gains Tax reliefs and deferrals, and certain employee bonuses can be paid tax-free.

But EOTs will not suit every family business. They work best where there is already a strong employee culture and where the family is comfortable stepping back from direct control. For others, this is too radical a shift.

Alongside EOTs, other structures offer different balances of control and flexibility. Family Investment Companies (FICs) have grown in popularity in recent years. At their simplest, they allow parents to set up a company, hold shares in it, and then gift shares to children or into trusts. Unlike a Discretionary Trust, a FIC can retain profits at lower Corporate Tax rates, giving scope to reinvest wealth. They also allow families to define voting rights and dividend rights separately, creating granular control over who has influence and who receives income. FICs can, however, attract scrutiny from HMRC, and their tax treatment may not always be as favourable as originally intended.

Partnerships, often structured as LLPs, are another option. They are flexible, transparent, and allow families to bring different generations formally into the ownership and governance of a business. The partnership model can work well where collaboration is valued, but it does mean that partners are directly exposed to tax on their share of profits, whether or not those profits are distributed.

Finally, foundations are a structure more common in civil law jurisdictions but increasingly used by internationally-connected families with ties to multiple legal systems. A foundation can look similar to a trust but has its own legal personality. This can make it easier to operate across borders, particularly for families with assets and beneficiaries in Europe or further afield.

What these alternatives demonstrate is that there is no single template for succession. Each structure comes with trade-offs – EOTs prioritise culture and continuity of ethos, FICs offer tax efficiency and control, LLPs create transparency and collaboration, and foundations provide international flexibility. The choice depends less on law in the abstract than on the family’s own objectives, whether that is preserving control, releasing capital, involving employees, or managing cross-border complexity.

The human element

Whatever the structure, no succession plan can succeed without careful attention to the human dimension. A trust can protect shares from external threats, but it cannot eliminate the need for dialogue and engagement. Letters of Wishes, family constitutions, and regular family councils all play a role in making sure that Trustees’ powers are understood and that beneficiaries feel connected to the enterprise.

Engaging the next generation early is particularly important. Too often, succession planning is treated as an exercise in drafting documents rather than building relationships. But the latter is what determines whether a family business thrives or fractures once control passes. Trustees may hold the legal authority, but the family itself must supply the cohesion and sense of purpose that makes succession sustainable.

Choosing the right path for succession

Trusts have endured as succession tools not because they are perfect, but because they strike a rare balance. They provide protection without paralysis, flexibility without chaos, and continuity without ignoring change. Used wisely, they can help families navigate the most difficult transition any business faces: the shift from one generation to the next.

Yet the trust is not a panacea. It is one instrument among many, and its success depends as much on governance, communication, and shared values as it does on legal drafting. The real art of succession planning lies in weaving together structure and substance, law and family, in a way that preserves not only the business’s assets but also its meaning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.