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Family Investment Companies – are they still effective tax planning? Image

Family Investment Companies – are they still effective tax planning?

January 14, 2022

Family Investment Companies (FICs), or Personal Investment Companies as they are sometimes known, have become an increasingly popular tax planning vehicle for high-net-worth individuals over the past decade.

 

Their increasing use came to the attention of HM Revenue and Customs (HMRC), and in 2019 a specialist unit was created to investigate whether FICs were being used for tax avoidance purposes, particularly with reference to Inheritance Tax.

 

The unit presented its findings to HMRC in the summer and confirmed that there was no evidence of a correlation between the use of FICs and tax non-compliance. As a result, HMRC wound up the unit and effectively gave the green light to tax planning using FICs.

 

Whilst this was undoubtedly good news, it came as no great surprise to many in the industry as FICs do not use fancy, complicated structures to contrive tax savings; they simply use the existing, commonplace structure of a limited company to benefit from the differences in tax treatment between individuals and companies and the flexibility available with a company vehicle.

 

However, as with many things in life, good news is often accompanied with bad. This came in the form of an increase in the main rate of corporation tax from 19% to 25% from 1 April 2023. This will impact many FICs as they are generally “close investment holding companies,” which do not benefit from the new small company rate of 19% for companies with profits of less than £250,000. Furthermore, the 1.25% increase in dividend tax rates from 6 April 2022 will increase the tax liabilities of shareholders receiving dividend distributions.

 

These changes will impact the overall tax effectiveness of FICs, but it is important to remember that FICs have always been about more than just tax benefits and they remain an effective means of protecting your wealth and investing for family members as explained below.

 

One catalyst for the rise in popularity of FICs was the 2006 legislative changes that reduced the financial benefits associated with trusts by bringing almost all new trusts into the relevant property regime, and hence liable to potential lifetime Inheritance Tax (IHT) charges and 10 yearly periodic charges. This legislation is still in place and limits the amount that can be gifted to trusts in lifetime without triggering IHT charges to just £325,000 each seven years, something that can be avoided by using FICs.

 

FICs are not usually funded by direct gifts of assets or funds to the company, as such gifts are chargeable lifetime transfers for IHT. Instead, it is more common for cash gifts to be made before the FIC is established so that family members can then invest into the FIC at the outset. These cash gifts are potentially exempt as transfers for IHT purposes and will in most circumstances, fall out of the IHT net after seven years.

 

As mentioned above, one of the key benefits of a FIC is the flexibility of the company structure, as it can be tailored to fit the family’s key objectives, such as saving income tax or estate planning, who in the family should benefit, whether there are specific income needs such as education costs, who should exercise control of the company and its investment strategy and family wealth protection from unforeseen circumstances such as bankruptcy and divorce. Furthermore, unlike investment bonds and some other investment wrappers, there are very few restrictions in what a company can invest in.

 

Once the family’s investment management strategy has been established, the FIC can be structured in such a way to provide the right combination of inheritance protection and wealth preservation for all family members. This can be achieved through the issue of different classes of shares, careful drafting of the company’s Articles of Association, and a well written shareholders’ agreement.

 

A common concern of families establishing FICs is the lack of financial privacy that comes with the requirement to file annual accounts at Companies House. This can be avoided by forming an unlimited company rather than a limited company, as unlimited companies benefit from an exemption from filing accounts with Companies House. The obvious downside to an unlimited company is that the shareholders bear joint, several and unlimited liability for the company’s liabilities, but if the FIC is used only to hold investments it is highly unlikely that it will ever have liabilities in excess of its assets.

 

For UK resident and domiciled taxpayers, a FIC is usually formed as a UK company, either limited or unlimited and registered at Companies House. In part, this is because it is a vehicle many taxpayers are familiar and comfortable with and also because a FIC registered offshore, will be treated as a UK resident for tax purposes if it is managed and controlled in the UK. However, if some or all of the shareholders are or become non-UK domiciled and resident, consideration should be given to creating and registering the FIC in an offshore jurisdiction so that UK tax liabilities can be minimised, and in some circumstances, provide international asset protection from UK IHT liabilities.

 

Offshore FICs can be particularly advantageous to individuals with a domicile in countries with whom the UK had Capital Tax Treaties before 1975 (France, Italy, India and Pakistan), but have resided in the UK long enough to have deemed UK domiciled status. This occurs when the individual has been resident in the UK in 15 of the preceding 20 tax years. Acquiring deemed domiciled status would normally bring an individual’s worldwide assets within the charge to UK IHT but with careful planning, these treaties can provide protection from UK IHT on assets located outside the UK.

 

What this means in practice is that long-term UK residents from one of the above countries could establish an offshore FIC and transfer their UK assets into it, effectively exchanging UK assets for non-UK assets in the form of shares in the offshore FIC and by doing so, providing UK IHT protection from the transferred assets into the FIC.

 

In summary, despite the recent changes to Corporation Tax Rates and Dividend Tax Rates, FICs remain an effective long term family investment structure and means of protecting family wealth for the benefit future generations.

 

At Rickard Luckin we believe that every client is unique. To advise our clients we need to know more than just figures and we therefore look to build lasting relationships, understand our clients, their family situations and their goals, to ensure that our advice helps and supports them to achieve those goals.

 

By Neil Spicer, Tax Associate at Rickard Luckin

 

For more information and advice, contact Rickard Luckin on +44 1245 254200 or email enquiries@rickardluckin.co.uk