HMRC secret unit targets family investment companies!

The issue

There have been a few articles in the press over the recent weeks about a secret HMRC unit working out what to do about family investment companies (FICs). Apparently, it was set up last April to investigate the growing trend of large family offices putting substantial assets into FICs.

By way of recap, a 20% inheritance tax (IHT) charge was introduced in 2006 which effectively blocked wealthy families from putting assets of significant value into trusts. Up until this time trusts had been a useful way of wealthy families moving assets out of their IHT estates and yet still maintaining control. After these changes were introduced, a new vehicle needed to be found which could achieve the same thing. This new vehicle was the simple limited company! Although a company is a simple and well-recognised entity, it is possible to get quite creative with its articles so as to achieve a variety of control and beneficial ownership permutations.

Simple example

Mr Sugar subscribes for £10,000,100 of share capital in a company as follows:

  1. 10M £1 A shares which have full capital and dividend rights

  2. 100 £1 B shares which have full voting rights but no rights to any assets or income.

He then gives the A shares to his 20 year old son while retaining the B shares. After seven years, £10M of value will fall out of his estate, yet he will still have power, via his retained B shares, to restrict his son accessing that value. Thus, at a superficial level, he has used the company in a similar way to a trust.

More on the secret unit…..

The unit was apparently revealed in a freedom of information request which was filed by Pinsent Mason and reported by the FT.

HMRC told the FT that “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”.

Forbes Dawson view

Although some of the reports are evoking images of Bond-like HMRC villains sitting in a cave somewhere plotting the demise of FICs, we do not think that there is a cause for alarm.

There have been many HMRC cases, studies and consultations that have not led to material change (the ‘money-boxing’ Entrepreneurs’ Relief consultation is one example that springs to mind as well as the shelving of the draft income-shifting legislation) and it is perfectly natural that HMRC should look into a trend that has been adopted by many wealthy families. Furthermore, it is difficult to see why a FIC is offensive from an IHT perspective.

There are of course other ways that HMRC could look to attack these structures. For example, by seeking to tax the head of the family under settlements legislation on income directed to family members, where the head of the family has made uncommercial loans (seen by HMRC to be ‘bounty’) to fund the FIC.

In our view FICs offer a responsible way for wealth to be passed between generations because they allow some level of parental control to be retained. It has always been possible to gift assets to remove them from an estate after seven years, but this can lead to the kids getting their grubby little hands on the cash before they have the responsibility to deal with it. In many ways FICs have rescued families from the negative consequences of the 2006 changes. Let’s hope that HMRC take a sensible approach once they work out what’s going on………

 

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