Good news – HMRC’s ‘secret’ specialist unit set up in 2019 to look into tax avoidance risks has been disbanded after finding no evidence of a correlation between the use of FICs and non-compliant behaviour.
The ‘secret’ unit was created in 2019, when HMRC recognized that FICs had become an increasingly popular inheritance tool for wealthy people. The unit was to examine the tax risks of FICs and in particular the associated Inheritance Tax (IHT) implications. News of the unit only came to light following a freedom of information request, and its clandestine nature caused individuals to reassess whether an FIC was still an appropriate vehicle to field. and whether those who had already established FICs would come under attack. by HMRC. However, since its inception, little has been heard of the unit or its activities.
Family trusts were the traditional vehicles used to carry out succession planning. However, FICs have become increasingly attractive over the past 10 years due to their structure and tax benefits.
An FIC is simply a limited liability company that owns and manages investments. One of the main reasons for using an FIC is to protect family wealth for future generations in a tax efficient manner. The benefits of a FIC are:
- Control – FICs are often created by a parent or grandparent, who will normally retain control of the business. Unlike a trust, FIC statutes can be specifically tailored to the needs of the family to create a bespoke vehicle. The articles of association may determine matters such as the appointment of directors, the distribution of profits, the return of capital and the transfer of shares. The corporate structure may allow for flexibility in voting, income and capital rights.
- Asset Protection – Business growth would sit with other family shareholders (even family trusts), entitling them to income or capital from the FIC. This allows the parents to retain control over the assets, but the accumulation of wealth rests with the children in a tax-efficient manner.
- Flexibility – The structure can be modified as the family grows to accommodate additional members.
- Tax – alongside the benefits of the IHT, FICs can also be tax-efficient vehicles since they do not attract the initial 20% IHT charge and bring income into the corporate tax system instead of personal tax burden. A company will currently pay corporation tax at 19%, which is generally lower than personal income tax rates. CIFs are particularly effective if profits are retained in the structure for reinvestment. There will be additional tax if profits are extracted from the company, for example through dividends.
There are of course disadvantages, so the structure should be carefully considered.
HMRC quietly disbanded the specialist FIC team, consolidating it into a larger unit. FICs will now be treated as “routine business” by HMRC, rather than subject to the scrutiny of a dedicated unit. However, the government does not rule out bringing anti-avoidance rules into play for FICs in the future, especially given the various minor changes made to corporate taxation in recent years.
There is no “one size fits all”, but CIFs can act as an effective succession planning vehicle when the structure is right. In the meantime, those with FICs or planning FICs can proceed with a sigh of relief knowing that the general view at HMRC now appears to be that FICs no longer pose a threat to investigations.