Ola Adeosun, Partner and Senior Wealth Planner
In April 2019, HMRC established a specialist division to investigate the workings of family investment companies (FICs). The presence of the division was relatively low key and only came to light as a result of a freedom of information request. At the time, HMRC tasked the unit to look into the use of FICs as a means of obtaining inheritance tax (IHT) advantages and possible tax exploitation.
Historically, the use of private trust arrangements was the vehicle of choice for families when transitioning wealth to future generations. However, since the changes to the taxation of trusts in 2006, and with the IHT nil rate band frozen at £325,000 per individual since the 2010/11 tax year, there has been a limitation on the effectiveness of trusts in passing on family wealth whilst retaining a degree of control over those assets. This, alongside the current low rate of corporation tax at 19%, has led to a noticeable increase in the use of FICs by wealthy families for intergenerational wealth succession.
FICs can be set up in a variety of ways but are often capitalised via the use of a loan, which enables the return of capital to be free of income tax. They provide the ability to separate control from beneficial interest with the use of different share classes allowing different members of the family to have varying apportionment to income and future capital growth. In addition, for entrepreneurial families used to running their own businesses, the familiarity of utilising a corporate structure in managing the family wealth can be attractive.
In the March 2021 budget, the Chancellor of the Exchequer announced an increase in the rate of corporation tax for closed companies from 19% to 25% starting from April 2023. The move was unsurprising, with the general consensus being that the long-term attractiveness of investment companies was likely to be curtailed as the Government increasingly looked at ways to plug the financial deficit induced by the COVID-19 pandemic. However, the recently published findings of the dedicated HMRC unit should provide a positive step to individuals considering utilising FICs in structuring their wealth.
The unit investigated tax risk associated with FICs and looked to ascertain if there was any correlation between the use of FICs and non-compliant behaviours. The unit has now concluded that FICs should be treated as ‘business as usual’ rather than subject to any additional scrutiny. This outcome should be very encouraging and indicates that inherently there is nothing abusive about the use of investment companies as a means of inter-generational wealth transfer – provided professional advice is sought and the company is structured within the spirit of the legislation.
HMRC will now be closing this unit indicating that, for the time being at least, there should be no special focus on the use of FICs in the foreseeable future. This move means that FICs remain an effective vehicle with which to transfer family wealth to future generations.
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