RNA interference (RNAi) refers to the ability of exogenously introduced double-stranded RNA to silence expression of homologous sequences. Silencing is initiated when the enzyme Dicer processes the double-stranded RNA into small interfering RNAs (siRNAs). Small RNA molecules are incorporated into Argonaute-protein-containing effector complexes, which they guide to complementary targets to mediate different types of gene silencing, specifically post-transcriptional gene silencing and chromatin-dependent gene silencing. Although endogenous small RNAs have crucial roles in chromatin-mediated processes across kingdoms, efforts to initiate chromatin modifications in trans by using siRNAs have been inherently difficult to achieve in all eukaryotic cells. Using fission yeast, here we show that RNAi-directed heterochromatin formation is negatively controlled by the highly conserved RNA polymerase-associated factor 1 complex (Paf1C). Temporary expression of a synthetic hairpin RNA in Paf1C mutants triggers stable heterochromatin formation at homologous loci, effectively silencing genes in trans. This repressed state is propagated across generations by the continual production of secondary siRNAs, independently of the synthetic hairpin RNA. Our data support a model in which Paf1C prevents targeting of nascent transcripts by the siRNA-containing RNA-induced transcriptional silencing complex and thereby epigenetic gene silencing, by promoting efficient transcription termination and rapid release of the RNA from the site of transcription. We show that although compromised transcription termination is sufficient to initiate the formation of bi-stable heterochromatin by trans-acting siRNAs, impairment of both transcription termination and nascent transcript release is imperative to confer stability to the repressed state. Our work uncovers a novel mechanism for small-RNA-mediated epigenome regulation and highlights fundamental roles for Paf1C and the RNAi machinery in building epigenetic memory.