HMRC Close Unit Investigating Use of Family Investment Companies

HMRC have confirmed that a unit set up in 2019 to research the use of Family Investment Companies (FICs) and the risk of tax avoidance associated with FICs has been closed after finding no correlation between FIC structures and non-compliance, and no evidence that those that use FICs are more inclined towards avoidance.

 HMRC’s comments on FICs and the closure of the unit were included in the Minutes of the Wealthy External Forum on 13 May 2021.

What are Family Investment Companies?

 A FIC is quite simply a company that holds investments.

 Depending on the circumstances and objectives the FIC may be set up so that:

·         Several generations of the same family hold shares,

·         Some/all of the shares are owned by a trust, and/or

·         Share classes are used to separate out the rights to votes, dividends, and capital. 

Why are FICs Popular?

Changes to taxation of trusts in 2006 mean that most lifetime transfers into trust above the nil rate band (£325,00 for an individual or £650,000 for a married couple) are subject to a 20% inheritance tax charge.

FICs are a useful alternative tax planning structure to trusts because the flexibility available through share classes allows the person setting up the structure to retain some control whilst avoiding the 20% inheritance tax charge associated with gifts into trusts.

 From a commercial perspective they also facilitate the pooling of family resources (whether money, time, or energy) and can be used to transfer assets to younger generations in a controlled manner.

What are the Risks Associated with FICs?

As with any tax planning consideration needs to be given to the overall objectives and wider family circumstances to ensure that the FIC is structured appropriately, and that the family understand the tax consequences and compliance obligations to set up and run a FIC.

Whilst there are never any guarantees that changes in tax legislation won’t happen in the future, HMRC’s comments should provide some reassurance that they are unlikely to target FICs.

Interested in discussing whether a Family Investment Company is suitable for you?

Contact Vikki Elliott by clicking the button below.