A dedicated unit set up by HM Revenue & Customs to investigate tax risks associated with the growing use of family investment companies (FICs) has been officially disbanded, after finding no cause for concern.
However, it is possible that apprehension linked to the review process could cause some wealthy families to be put off from using this effective planning tool.
The special investigation unit was established by HMRC in April 2019 to investigate the use of FICs at a time when they were becoming increasingly popular.
Specifically, HMRC had noted that FICs were being used as a tax planning vehicle, "often with the primary objective of generational wealth transfer and mitigation of inheritance tax". In undertaking the review, HMRC wanted to improve its understanding of FICs and how they were being used.
No cause for concern
Following a two-year review process, HMRC’s conclusion was that there is no cause for concern.
Minutes published from a meeting that took place in May 2021 state that the review found "no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours". The unit has since been disbanded and subsumed into the wealthy and mid-sized business unit.
FICs have become more popular in recent years for a number of reasons. The ability to transfer generational wealth in a controlled and protected structure, and the mitigation of IHT, as cited by HMRC, are both key attractions.
As company structures, FICs are more familiar and commonplace than trusts, which has contributed to their popularity. Using a company to hold wealth can also significantly reduce an individual’s annual tax exposure when compared to personal tax rates.
Legislation made family trusts less attractive
Legislative changes affecting family trusts, which took effect in 2006 making them rather unattractive from a tax perspective, mean it is now a significant challenge to pass wealth to the next generation without making them directly responsible for its management, with all the accompanying risks.
So, it is of little surprise that FICs have become the tax planning vehicle of choice for many wealthy families in recent years, particularly those that wish to pass wealth to the next generation tax-efficiently, while still maintaining an element of control.
By establishing an FIC, principal family members, such as parents or grandparents, are able to pass existing wealth to the next generation, or ensure that future capital growth passes to them, without compounding their existing IHT exposure.
Principal family members can determine benefits
The flexible nature of FICs also means these principal family members can determine how each member benefits by defining the rights attached to each class of share. By taking this approach, principal family members are able to ensure that income and capital pass to them in years to come.
There are annual tax benefits too. For example, a 19 per cent rate of corporation tax is payable on profits and 0 per cent on company dividends. Even from 2023, this rate will continue unchanged for those companies with profits less than £50,000 and compares very favourably when compared to the personal tax rates, which would apply if the wealth had remained in personal ownership.