HMRC has recently announced the closure of a specialist team which had been tasked with investigating the risk of tax avoidance posed by Family Investment Companies (FICs) – the team found that FICs were used as a planning tool, rather than a vehicle for non-compliance with tax regulations.
FICs have gained in popularity in recent years as a means of passing on intergenerational family wealth in a tax efficient manner, whilst retaining control over those assets. Historically family trusts have been the favoured option; however, changes in the taxation of trusts have made FICs an attractive alternative for some clients. Given their increased popularity, FICs had attracted greater scrutiny from HMRC.
The key features of a FIC, a private limited company controlled by a board of directors, are:
- family members, and possibly family trusts, are the shareholders, sometimes taking different classes of shares with different rights attached
- bespoke articles of association and a shareholders agreement ensure that the FIC is suitable to operate in a family estate planning context
- capital is introduced by subscribing for shares and/or making loans to the FIC without an immediate charge to Inheritance Tax (IHT) – by contrast, a family trust would attract an immediate charge of 20% to the extent an amount in excess of £325,000 is gifted into trust
- the FIC’s profits (both income and gains) will be subject to Corporation Tax at 19% (25% from 1 April 2023), allowing more of the income and gains to be reinvested in the FIC to generate further capital growth
- when profits are extracted from the FIC by way of dividend, the shareholders will be taxed at their personal marginal rates, between 7.5% and 38.1%.
HMRC said: “The objective of this research was to establish an improved understanding of FICs in order that HMRC can better support taxpayers who use FICS to understand and comply with their tax obligations.” They have found no evidence to suggest that there is a correlation between those who establish a FIC structure and non-compliant behaviours; the use of FICs appears to be a planning strategy, often with the primary objective of generational wealth transfer and the mitigation of IHT.
This is welcome news for the taxpayer as FICs continue to offer an alternative to the family trust – Katherine Hague is happy to discuss how a FIC may be of benefit to your family.