20 August 2021
Revelations emerged last year that HMRC had established a secret unit in April 2019 to review how family investment companies (FICs) were being used by wealthy individuals. In particular, the unit examined how these companies could be used to minimise someone’s exposure to inheritance tax (IHT). The findings of that HMRC review have now been revealed, and they arguably make for surprising reading.
The rise of the family investment company FICs have become increasingly popular structures with high net worth individuals in the last decade or so. They are often established by parents or grandparents who would like to pass wealth and assets to wider family members whilst also retaining some control over the assets during their lifetime. The traditional vehicle used to achieve this objective is a family trust, but the growing popularity of FICs directly mirrors a decline in the use of trusts in the UK. FICs are not the cause of this decline but rather a symptom. In 2005, there were an estimated 220,500 taxpaying trusts in the UK and the latest statistics show this has now fallen by nearly a third to around 151,000. This is partly due to a potential upfront 20 per cent IHT cost that can arise when establishing a trust, following a change in tax rules in 2006 which brought in a charge on the creation of most new trusts that may not have been chargeable previously. No such upfront IHT costs typically arise with FICs, which make them attractive vehicles for wealthy individuals as they achieve a similar objective to trusts and can minimise their exposure to IHT. However, there are key differences in how they operate.
What are they? A FIC is simply a company, typically set up in the UK, which holds investments that would otherwise be held by family members personally. FICs are often established by a parent or grandparent, who will normally retain control of the company and therefore control the company’s assets. Other family shareholders will typically hold shares in the FIC, entitling them to income or capital from the FIC on a winding-up, but, importantly, they are not in control of when they receive any profits and, if so, how much.
HMRC review Given the advantages of FICs, it was no surprise to hear that HMRC had established a specialist unit in 2019 to examine how these structures operate. This news only came to light following a freedom of information request, and the clandestine nature of the review resulted in many individuals reassessing whether FICs were still appropriate vehicles to set up to hold their investments. The results of HMRC’s review have been keenly anticipated ever since and those who have already established FICs were concerned they were going to be subject to attack by HMRC.
In the event, taxpayers’ worst fears have not been realised. With little or no fanfare, HMRC has concluded its review and quietly wound up the specialist FIC team, subsuming it into a wider unit. The brief comments provided from the review outline that HMRC found ‘no evidence to suggest those using FICs were more inclined towards avoidance’ and that ‘FICs are now looked at as business as usual rather than having a dedicated team’.
The future HMRC is keeping its cards close to its chest as to whether new legislation might be introduced in the future on FICs, and there have been various small changes to the taxation of companies in recent years which have impacted on their effectiveness. This might therefore be a route HMRC continues to explore to raise tax receipts to pay for public services. In the meantime, it seems FICs are out of the immediate firing line and HMRC’s general view appears to accept that there’s ‘nothing to see here’.
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