HMRC relax their view of family investment companies
1 October 2021
New Quadrant partner Paul Davidoff reports back on HMRC’s “Family Investment Company” (FIC) team’s research into FIC usage by wealthy families.
What has HMRC been doing?
In April 2019, HMRC set up a “Family Investment Company” (FIC) team to look into the increasing use of FICs in the context of estate and tax planning. They say that their aim was to obtain a better understanding of how FICs are used, so that they could “better support taxpayers who use FICs to understand and comply with their tax obligations”. This may be a more diplomatic way of their saying that they wanted to see whether there was any consistent use of FICs in the evasion (or inappropriate avoidance) of tax.
What is a FIC?
A FIC is simply a company, in the ordinary sense of the word. However, the main purpose of a FIC is to hold and manage investments, rather than to run a business. There is considerable flexibility in how a FIC can be set up, which provides scope for it to be used in a variety of family circumstances.
FICs are usually owned by a single family group, often extending across two or more generations. There are typically a number of share classes conferring differing rights to income, capital and control, depending on what those setting up the FIC want. The “Articles of Association”, often coupled with a “Shareholders’ Agreement”, can enable certain individuals (who may well be both directors and shareholders) to retain control of the FIC, whilst providing a flexible source of income, and sometimes capital, to others, depending on the needs of those involved. It is also not uncommon for a trust to hold shares for some family members.
These arrangements can enable a FIC to be used in a tax effective manner, not only from an income tax and capital gains tax standpoint, but also to help mitigate inheritance tax.
One particular advantage of a FIC is that it enables the investments of a number of family members to be managed collectively and in a coherent manner, rather than disparately in the hands of each of the various individuals. This can also be more cost-effective, as a result of economies of scale.
What is the outcome of HMRC’s research?
HMRC reached a number of interesting conclusions, which include, at least in relation to the FICs which they looked into:
- The average FIC has assets of c£5m.
- Consequently, FICs are generally used by “wealthy” individuals – to HMRC, “wealthy people” have an income of £200,000+ or wealth of £2m+.
- Those setting up FICs tend to be aged 50+.
- Extremely wealthy people tend not to use FICs, but manage their wealth via a “family office”.
- There is no correlation between the use of FICs and the failure to report one’s tax affairs correctly.
It is most likely to have been the last of those points which has led HMRC to conclude that they no longer need a team dedicated to investigating FICs. In future, where HMRC does have concerns about the use of a particular FIC, it will be their wider “Wealthy and Mid-sized Business Compliance” team who will look into it.
HMRC’s decision to have their FIC team subsumed into their Wealthy and Mid-sized Business Compliance team seems to send a clear message that HMRC do not consider the use of FICs, as a family investment management and tax planning vehicle, as something that is indicative of tax avoidance or evasion or something which, in itself, would trigger an enquiry.
Nevertheless, there is tax compliance required in connection with FICs, potential by both the FIC itself and those connected with it and it is important to ensure that all tax returns are completed fully and on time.
Also, there is already legislation targeted at particular ways in which FICs have been used in the past to circumvent certain tax rules. To date that legislation has only been invoked in relatively limited circumstances. Despite HMRC’s comments, it remains to be seen whether the Government will increase the level of taxation of FICs or introduce any new taxation of FICs, or whether HMRC will extend the situations in which they will seek to apply the existing anti-tax avoidance legislation.
However, for the time being, it seems that not only do FICs provide a flexible and tax-efficient way to manage a wealth family’s investments collectively, but that doing so is not, in itself, going to attract HMRC’s attention unduly.
If you would like to learn more about how a FIC or a trust might be appropriate in your circumstances or discuss a FIC or a trust which you already have in place, please contact Paul Davidoff or Sophie Voelcker.