What future for family investment companies?

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A dedicated unit set up by HM Revenue & Customs to investigate the tax risks associated with the growing use of Family Investment Companies (FICs) has been officially disbanded, after finding no cause for concern.

However, apprehension about the review process may deter some wealthy families from using this effective planning tool.

The Special Investigation Unit was set up 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 used as a vehicle for tax planning, “often with the primary objective of transferring generational wealth and mitigating inheritance tax”. In undertaking the review, HMRC wanted to improve its understanding of FICs and how they were used.

No reason to worry

After a two-year review process, HMRC’s conclusion was that there was no cause for concern.

Published minutes of a meeting that took place in May 2021 say the review found “no evidence to suggest there was a correlation between those establishing an FIC structure and non-compliant behavior.” The unit has since been disbanded and incorporated into the wealthy, mid-sized business unit.

FICs have become more popular in recent years for a number of reasons. The ability to transfer generational wealth into a controlled and protected structure, and the mitigation of IHT, as cited by HMRC, are the two main attractions.

As corporate structures, FICs are more familiar and common than trusts, which has contributed to their popularity. Using a corporation to hold wealth can also significantly reduce an individual’s annual tax exposure compared to personal tax rates.

Legislation has made family trusts less attractive

Legislative changes affecting family trusts, which came into force in 2006, making them unattractive from a tax point of view, now make it difficult to pass on an estate to the next generation without making them directly responsible for its management, with all the ensuing risks.

It’s no surprise, then, that CTFs have become the tax planning vehicle of choice for many wealthy families in recent years, especially those who want to pass their wealth on to the next generation in a tax-efficient way, while still retaining an element control.

By establishing an FIC, key family members, such as parents or grandparents, are able to pass on existing wealth to the next generation, or ensure that future capital growth is passed on to them, without aggravating their existing IHT exposure.

Primary family members can determine benefits

The flexible nature of FICs also allows these core family members to determine the benefits of each by defining the rights attached to each class of shares. By taking this approach, key family members are able to ensure that income and capital accrue to them in the years to come.

There are also annual tax benefits. For example, a corporate tax rate of 19 percent is payable on corporate profits and 0 percent on corporate dividends. Even from 2023, this rate will remain unchanged for companies with profits of less than £50,000 and compares very favorably to personal tax rates, which would apply if the wealth had remained in personal ownership.

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