By Helen Clarke, Tax, Trusts and Estates partner at Irwin Mitchell
Back in August, HMRC closed its investigation unit for Family Investment Companies (FICs), citing “there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours”.
While the move was a welcome one, those utilising FICs must continue to ensure they are structured carefully in order to avoid attracting unwanted tax consequences or challenges by HMRC.
Practitioners should remember the client’s objectives need to be discussed in detail from the outset. FICs should form part of a long-term planning strategy and need to be flexible enough to deal with changes in circumstances. It’s important to consider from the outset what the funds are intended for and when. If a FIC is brought to a close prematurely due to unanticipated capital needs, the tax consequences could be significant and unwelcome.
FICs should be kept as simple as possible (although some may be more complex as every FIC is bespoke). All family members who are involved should be engaged in the process, so that all parties understand the planning and the structure.
Corporate lawyers should work closely together with private client lawyers from the outset to ensure that the company articles and shareholders’ agreements are drafted in a way where all objectives are met. Failure to consult with advisors who understand both aspects of a FIC may result in missed opportunities for wealth protection.
A bespoke shareholders’ agreement, for example, should normally include transfer restrictions to prevent shares from being passed outside the bloodline and often require shareholders to enter into nuptial agreements (considerations that may not be obvious without the input of a private client practitioner);
Careful thought needs to be given as to how to retain control of the FIC without inadvertently retaining an asset with a significant value for inheritance tax even if the shares retained by the founders do not have any capital or income rights attached to them. HMRC are likely to apply 20 to 25% of the value of the FIC to the voting shares. There are ways to mitigate this with proper planning.
We advise that if a FIC is being funded with a loan that it should be subject to a commercial rate of interest. This is to counter the view expressed by HMRC (although not yet taken in practice) that where an interest free loan is made to a company and dividends are paid to family members, all or part of those dividends should be taxable on the lender not the shareholder as the loan is a form of settlement.
Sufficient assets should be retained outside of a FIC to fund a family’s short and medium-term capital needs. The tax cost of extracting capital from a FIC can be high. If liquidity beyond dividend distribution might be needed by the next generation, consideration should be given to issuing some of the initial share capital as redeemable preference shares. The holders of these shares can dispose of them (with Director consent) without incurring a CGT charge. Alternatively, if a FIC is funded with a loan, the founder could assign part of that loan to the next generation.
Specialist valuation advice is often required depending on the asset class in a FIC and the nature of any structuring that is being undertaken. With historically low rates of CGT at present, it may be advantageous to establish a FIC structure sooner rather than later, ahead of any increase in those rates as holdover-relief is not available.
Whilst HMRC may have drawn a line now, it is unknown what policy or legislation may be introduced in future applicable to FICs. Structures should be sufficiently flexible in order to allow for changing circumstances although all estate planning is subject to change through HMRC practice and/ or the introduction of legislation.
This article was originally published by Taxation magazine, Issue : Vol 188, Issue 4808, 14 Sep 2021.