In April 2019 HMRC revealed the existence of a new unit which was created for the sole intention to investigate high net worth families in the UK. This new unit sits inside Wealthy and Mid-sized Business Compliance (WMBC) and is tasked to reduce high net worth families exploiting family investment companies to avoid inheritance tax.
What is a Family Investment Company?
Essentially, a FIC is a private limited company which is usually set up by parents as a vehicle to manage or invest their family wealth. The FIC will have unique articles that set out the rights and interests of each of the members and assign them share classes. This enables family members to have differing levels of control over company decisions and rights to receive dividends.
What is the Family Investment Companies Unit?
If a FIC has a combined asset total of more than $1 trillion, then it would be firmly in the sights of HMRC’s new Unit. The Unit identified that many FICs were simply being used to bypass the many anti-avoidance rules placed in recent years on trusts, which were once a very popular tax-avoidance tool.
In an attempt to maximise their revenues from the UK’s richest families, HMRC set up this team in April last year due to the growing concerns that the ultra rich were avoiding paying tax through an extensive network of legal loopholes.
How do FIC’s avoid Tax?
Many FIC’s are being used as inheritance vehicles to hold assets, bonds and stocks, which would pay out dividends periodically subject to corporation tax. Importantly, these dividends would not be taxed as personal income, benefiting from the lower rates of corporation tax (assuming the shareholder are higher rate tax payers). This would allow parents to bring their children into the FIC as shareholders, thus reducing inheritance tax in some circumstances.
An HMRC spokesperson stated that:
“The Family Investment Company team was established to look at FICs and do a quantitative and qualitative review into any tax risks associated with them with a focus on inheritance tax implications. The team’s work is exploratory at this stage and as such, we would not like to share any more details”.
Why use a FIC?
Aside from the clear tax benefits, the bespoke nature of FICs allow for greater control over assets and investment strategy than outsourcing the role to investment managers and private banks. Thus allowing parents to exert control over their children’s finances.
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