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If one follows the direction of the winds on Family Investment Companies (“FICs”), then one might have got the following feeling from various commentators:
Of course, neither of these views is true. A FIC is neither sliced bread nor is it Lucifer’s spawn.
Spawn on toast, perhaps?
FICs under the spotlight
It appeared that FICS were under the spotlight following an article that appeared in the FT in late 2019 /early 2020 which said that HMRC were setting up a special unit to review the use of FICs.
I understand that this information was uncovered following a Freedom of Information request asking whether HMRC were looking at these vehicles. Of course, the answer was in the affirmative and they confirmed the existence of this team (which HMRC’s notes show was established in April 2019).
Of course, the increasing use of FICS since 2006 means that HMRC MUST have been monitoring the use of FICs. My view is it would be a dereliction of duty if they were not!
The use of FICs
I may be burnt at the stake for this, but there is nothing particularly special about a FIC.
It is simply a company… managed and controlled by a family.
Now, like the DNA of any Company, it can be as a simple or complex as desired.
They are generally used for estate planning.
Clearly, if one wants to simply and effectively reduce one’s estate then one can give away one’s assets and, as long as survive by 7 years (PET), then no IHT.
But often people want to reduce the value of their estate, but do not want to give up complete control of the asset. So, whether talking FICs, trusts or family partnerships one is usually looking at giving assets away but retaining control over the capital.
In this regard, FICs have become popular for two tax reasons:
In themselves, are FICs vectors of tax avoidance? My view is no.
Could you create a FIC that HMRC found objectionable? Well, conceivably, yes. If you create a FIC with complex, dare I say it artificial, share rights then you potentially could.
For further information on FICS please see our video on this type of structure.
‘Nothing to see’
It was revealed in the notes of HMRC’s Wealth External Forum held on 13 May 2021 that HMRC had pulled the plug on their research and the team had been ‘subsumed into WMBC’ and that ‘FICs are now looked at as business as usual’.
HMRC found, as part of their research, that “there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours’ and no evidence that FIC users were ‘more inclined towards avoidance’.
It must be said, more generally, that is refreshing to see HMRC draw a distinction between ‘mitigation’ and ‘avoidance’.
Plain sailing for FICs then?
There are already plans afoot which will certainly impact the attractions of a FIC in the form of:
Corporation tax rates and a CIHC in the teeth
Firstly, the main rate of corporation tax rate is scheduled to increase from 19% to 25% with effect from April 2023.
In addition, we have the return of a small companies rate and a marginal rate of tax. The new small profits rate of 19% will apply for companies with profits of less than £50,000.
Companies with profits above this threshold will be subject to the increased rate of 25% with the introduction of marginal relief (essentially a 26.5% rate) for profits between £50,000 and £250,000.
These thresholds are to be reduced proportionately for the number of associated companies and for short accounting periods.
Clearly, for FICS gobbling up dividends from equity portfolios then this is not likely to be a problem. However, for other asset class holders, this will have some impact on the returns within the Company.
In a further wrinkle, those with an interest in FICs should note that the small profits rate will not apply to close investment-holding companies (CIHC). A term dredged up from the past.
In broad terms, a company will be a CIHC if it is owned by five or fewer shareholders and does not exist wholly or mainly for the purpose of trading commercially or investing in land for letting to an unconnected party.
So, where the FIC is not invested in equities or letting property, it is likely that they will need to consider whether they are taxable at 25% on their full profits.
Office for Tax Maximisation report
The Office for Tax Simplification in its first report on CGT also, and perhaps beyond the call of duty, flagged that FICS might also need to be addressed as part of any reform, as I pointed out in my article in November last year.
The OTS noted:
“Such family investment companies can offer a range of tax advantages”
As I mentioned at the time, I assume that the use of ‘tax advantage’ was intended in a natural sense rather than the technical sense, a gateway through which one usually has to pass through for anti-avoidance rules to bite.
This because the tax consequences of holding assets or performing activity through a company, in itself, is not tax avoidance. Even if in a family context.
Indeed, it seems that HMRC’s comments on FICs supports my view.
We are told in that same report, somewhat emotively, they are used for ‘funnelling’ value in to shares held by children. Of course, value can be ‘funnelled’ into the hands of children using partnerships, LLPs or, indeed, through the classic trust.
The OTS CGT review acknowledges, currently, there is no real CGT benefit in using a FIC.
However, it states that if the rate of CGT is aligned with income tax then the FIC will provide an incentive to use a FIC to gain a tax advantage. Of course, this report was ahead of the changes to corporation tax I have flagged above. Do the forthcoming changes represent enough of a narrowing of the tax rates for the OTS’ liking?
Or does the OTS CGT review flag that the fate of FICs and potential reforms of the CGT regime will be entwined and that changes to CGT would require another look at FICs?
What this illustrates, if nothing else, is that tax changes in one part of the ‘ecosystem’ will create a change in behaviour elsewhere.
Tax’s very own version of the butterfly effect.
In conclusion, FICs aren’t the answer to all of your tax problems but they can continue to play a role. As such, nothing at all has changed over the last few years.
However, change is probably the watchword here.
As with any UK tax planning, one must prepare for the ‘c’ word. This is especially the case with estate and tax planning. For planning that might be around for decades, the only thing that can be guaranteed, is the legislative tax framework will be different. As such, there is inherent danger in locking up assets in a structure that cannot be flexed easily and efficiently.
FICk the bones out that one.
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