A dedicated unit set up by HM Revenue & Customs (HMRC) in 2019 to investigate the risks associated with family investment companies (FICs) has now been disbanded, after finding no cause for concern. Ben Taylor, associate solicitor at top 200 national law firm Roythornes Solicitors, explains the significance of this decision and why FICs are a growing trend among those seeking an effective wealth planning tool and long-term investment vehicle.
“The decision made by HMRC will be welcomed by those who have invested through a FIC and those looking to set one up. The review was prompted by an increase in FICs being created and concerns over whether they are linked to tax avoidance. For those of us advising on the role of a FIC in estate and tax planning, it wasn’t surprising when HMRC reported to the Wealthy External Stakeholders Forum that “In the research we undertook there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviors.”
“In practice, FICs are being considered as an alternative to trusts, hence HMRC commenting that “legislative changes over the past 10-15 years have reduced the financial benefits associated with trusts and increased the costs of managing family wealth through these structures.”
“The compliance for trusts has also increased in recent years following Money Laundering Directives four and five. Trustees need to maintain certain information about the trust, such as decisions and discussions during meetings. There will also likely be annual returns, and possible returns on exits from the trust and on ten-year anniversaries. By comparison, FICs do not require much more to maintain.
“So how can family investment companies be used as a legitimate long-term investment vehicle?
“Starting with who might be interested, FICs tend to attract those who are familiar with running a company. For example, entrepreneurs who are used to corporate compliance, accounts and returns. Often, there will have been a trigger event such as the sale of a business, resulting in a pot of cash. That raises questions of Inheritance Tax (IHT) as cash isn’t relievable, and for most, that cash must be put to work. The other questions stem from how and where the cash should be handled.
“That is not to say it has to be cash. Many FICs are funded with property or other assets, but cash is, frankly, less complex from a tax perspective.
“Very often people still want control. A FIC allows for lawful IHT planning, keeping wealth within the family, but typically allowing parents to maintain control of assets such as stocks, bonds, and property. In addition, a FIC can offer protection on divorce, as the courts tend to be unwilling to go ‘behind the corporate veil’. Even if an award were made on a divorce, it would usually be the shares in the FIC that would be available and not the underlying assets.
“IHT benefits tend to come from either holding shares that don’t grow in value, which means all the growth in the value of the FIC is outside of the estate, and/or relying on a decent minority shareholder discount. FICs have an advantage over trusts in that lifetime IHT shouldn’t apply on creation, allowing the “settlor” to move more wealth in straight away.
“For Income Tax, FICs can also allow families to direct income to where it is needed in a tax efficient way, typically using “alphabet shares.”
“Every FIC should be carefully designed for the family concerned, taking into account attitudes to risk, the nature of the assets available and the family dynamic itself. The Articles and Shareholders’ Agreement need to be carefully considered and should be tied up with a review of Wills and Lasting Powers of Attorney. Some families also consider a “Family Charter” to set out the aims of the family in regard to wealth generation and preservation.
“FICs should also be created having considered both the Settlements Legislation and the transactions in securities rules, both of which can help to spoil the best-laid plans.
“Wealthy individuals have a range of options available to them for tax and estate planning, and it will often involve more than one solution. The growing popularity of FICs suggest that they really are an option that should be considered by anyone who has ambitions to help their family both now and in the future.
“A FIC is a long-term vehicle for achieving growth and passing on family wealth but change to regulations and taxation is always possible, so they must not be viewed as entirely risk free. My best advice is to work closely with an expert – most likely a solicitor, accountant and investment manager – to ensure that all aspects of the FIC are created in a way that benefit you and your family, and so that it sits well with your estate, tax and succession planning.”