A recent report in the Financial Times stated that Government borrowing is set to hit £350bn – the highest level in peacetime for more than 300 years. According to the Institute of Fiscal Studies, the Chancellor will need to raise taxes by £40bn a year by 2025 to keep the national debt under control. The cost of the Coronavirus pandemic will be with us for many generations.
However, the Conservative government had been looking for ways to collect further revenue well before Coronavirus upturned all our lives. For example, back in those idyllic days of February 2020, when Covid-19 was merely a side-issue to Brexit and Prime Minister, Boris Johnson was still “…shaking hands continuously…”, it was discovered that HMRC had set up a secret unit to investigate the use of a Family Investment Company (FIC) by high-net-worth families to minimise Inheritance Tax (IHT).
In 2006, tax laws relating to trusts were substantially overhauled. A 20% IHT charge was immediately placed when a trust was set up and further charges could be levied every ten years. Before these changes, a ‘flexible trust’ could effectively avoid any IHT if the Settlor survived seven years after establishing it.
The new laws largely curtailed the ability of wealthy families to move valuable assets and capital into trusts to minimise IHT but still retain control. A new vehicle had to be found to achieve the same results, and it presented itself as a limited company, namely, an FIC.
How FIC’s are structured
An FIC is set up with family members. Typically, parents or grandparents form a company limited by shares. Each parent or grandparent owns one share each. This type of share provides the right to vote at shareholders’ meetings and appoint directors. However, they have no right to receive dividends or access the company’s capital. The children/grandchildren have one share each. But these shares confer no voting rights but benefit fully from dividends and/or return on capital.
FICs allow parents/grandparents to retain full control of the assets, whilst providing benefit for their children/grandchildren. Loans from parents/grandparents are used to fund the FIC, which acquires property, shares, art or other assets that generate a return. Income is used to repay the loan or is reinvested into the company, with residual income going to the children/grandchildren.
Generated profit will be taxed at corporation tax rates, which is significantly lower than personal income tax. And IHT on assets owned by the company can be completely avoided, although if shares are gifted, the seven-year survivorship rule applies.
What we know about HMRC FIC investigatory unit
HMRC told the Financial Times :
“The Family Investment Company team was established . . . in April 2019 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.”
The new investigations unit is part of the HMRC’s Wealthy and Mid-sized Compliance Directorate. HMRC defended its position not to reveal details about the new team because doing so “would allow opportunistic individuals and would-be avoiders [to] identify where HMRC is devoting resources and arrange their activities to escape challenge”.
Should I worry?
From reading thus far, you may have drawn a picture of a team of covert, grey suited men and women squirreling away in a dark office, poised to make a “We’d just like to ask you a few questions” type call to your wealth manager. But fear not, there have been many examples of HMRC investigations and consultations that have not resulted in any significant changes. And we must also bear in mind that the department has a lot on its plate at the moment, for example, clawing back millions in ‘furlough fraud’.
FICs provide a solid, responsible structure for families to protect their wealth and ensure beneficiaries do not have the chance to erode capital through imprudent investments or extravagant habits. They also provide a way for people to structure their affairs to minimise IHT, which is a perfectly legal thing to do. However, if you have any concerns, we would be happy to discuss them with you.
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Here at legalmatters we work with many financial advisers, wealth managers and accountants throughout England and Wales; we’re set up to work collaboratively to the benefit of the end client… we’re an extension of your business, combining great financial and legal advice.
If you are interested in working with us please contact Lucy Thomas on 01243 216901 or by email.
 The South Sea Bubble crash, which Britons were still paying off interest in 2014