HM Revenue & Customs (HMRC) has quietly created a team to look into the use of family investment companies (FIC).
The division was set up in April 2019, and its existence came to light in a freedom of information (FOI) request submitted by law firm Pinsent Masons.
The taxman is investigating whether wealthy families are using FICs to avoid paying inheritance tax (IHT).
This is because, unlike trusts, funds paid into an FIC are not subject to upfront IHT. Taxes are applied at either 19% of profits made by the company, or when the capital is released, the law firm added.
International Adviser contacted HMRC for comment, but the taxman did not reply in time for publication.
Secretive crackdown
Steven Porter, partner at Pinsent Masons, said: “The tax affairs of family offices and the use of FICs are the new frontier in HMRC’s crackdown on ultra-high-net worths (UHNW).
“Setting up this new unit is a clear statement of intent – to ensure that HMRC maximises revenues from the UK’s richest families.
“Using FICs makes sense in many cases. However, HMRC is clearly on the lookout, and families need to ensure their affairs are in order. Tax investigations can take years and be very costly for those involved,” he added.
Natalie Sherborn, partner at Pinsent Masons, added: “It remains to be seen if the family investment companies unit’s focus on UK FICs will also result in an increased appetite to refer criminal offending, whether by the FIC or UHNW individual, to the prosecution agencies for criminal sanction to send a strong deterrent message.”
How does it work?
An FIC is essentially a private limited company set up for estate planning purposes.
Family members will be the shareholders, with different levels of control over the company, rights to receive dividends, and entitlement to its capital value, according to Lucy Edwards, partner at law firm Penningtons Manches.
“Parents can transfer value and responsibility to their children in stages through the company structure, whilst retaining the oversight and control of the company,” she said.
“[An] FIC can be a flexible vehicle for parents to establish a structure to manage the investment of family wealth and the eventual transfer of its value to the next generation in a controlled manner.
“For tax purposes, the timing of any gifts they make will be when value and rights are moved from them to their children, or other family members or trusts.
“This can be planned in a staged manner, to carefully control the timing and value that is transferred and the tax treatment of doing so.”
Strategic planning or avoidance?
According to Edwards, wealthy families would be able to pay less tax, since FICs are not subject to income tax.
“The tax regime applicable to FICs might offer some advantages over a lifetime trust where the value it contains is substantial.
“As companies, FICs are subject to corporation tax on the income they receive, which is likely at a lower rate than the personal marginal income tax rates – assuming that the shareholders are higher-rate tax payers.
“Furthermore, with effect from 1 July 2009, most dividends received by a UK company are exempt from corporation tax.
“The beneficial dividend rates for companies effectively facilitates the growth roll-up of dividend income by deferring taxation until a distribution is made from the company.
“If the FIC holds an investment portfolio of UK companies, this would be an effective means of estate planning,” she added.
