A unit at HM Revenue & Customs tasked with assessing the tax avoidance risks associated with the growing use of family investment companies (FICs) has been folded into another team.
The unit was set up in April 2019 after the taxman concluded that FICs had become more popular than trusts.
But, according to the minutes of an HMRC conference call in May 2021, the decision was taken that a dedicated unit was not required.
What did it do?
- Carried out research into the use of FICs,
- Sought to establish the common characteristics of FICs – including the age and wealth profile of people who set up this kind of structure,
- Investigated areas of tax risk associated with FICs and whether there was a correlation with evidence of non-compliant behaviours.
“The objective of this research was to establish an improved understanding of FICs in order that HMRC can better support taxpayers who use FICs to understand and comply with their tax obligations,” the minutes of the call state.
What is a FIC?
HMRC has no statutory definition of a family investment company, as they are all set up and operate differently.
But similar characteristics involve:
- Shareholders being members of the same family – usually over at least two generations,
- Shareholdings can be direct or via a trust,
- There are multiple share classes,
- Rights attached to the shares often differ depending on the age or generation of the shareholder,
- The company does not trade but holds investments.
A sample of FICs found the average assets amounted to around £5m ($6.95m, €5.85m).
Extremely wealthy individuals and families, however, are more likely to use a family office to manage their finances rather than establish a FIC.
The key findings of the team were that FICs appear to be a planning strategy, often with the primary objective of generational wealth transfer and mitigation of inheritance tax.
There is some diversity in the way that a FIC is structured and managed. This creates tax risks across a variety of regimes; including IHT, CGT, SDLT and corporation tax.
However, the minutes note that “in the research we undertook, there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours”.
“As with any analysis of a taxpaying population, the same broad range of tax compliance behaviours were observed, with no evidence to suggest those using FICs were more inclined towards avoidance.”
As a result, the dedicated FIC unit has been subsumed into the wealthy and mid-sized business (WMBC) unit.
Family investment companies are now looked at as ‘business as usual’ rather than having a dedicated team.