Family Investment Companies: HMRC are still lurking in the shadows…

HMRC hve been revealed that a secret unit has been created to assess the risks of Family Investment Companies (FICs) to the tax system in the UK, with particular reference to their associated inheritance tax (IHT) benefits. If you’re reading this and wondering what a FIC is, then you can find out more about that here.

FICs have become increasingly popular with wealthy families in the last ten years, primarily as a result of changes to the taxation of trusts. As you would expect their rise in popularity corresponds to a matching decline in the use of trusts in the UK. Both of these structures are regularly used to achieve a similar objective: a desire by parents to pass assets down to the next generation whilst retaining some control of those assets during their lifetime. The principal difference is in how the two are taxed!

I would go so far as to state that is is largely a problem of HMRC’s own making though. We have seen a great decline in the number of tax-paying trusts in the UK since significant changes were made to the system in 2006, primarily the biggest hurdle being a potential 20 per cent upfront tax charge can arise on assets settled on trust where they are over and above £325,000 (per settlor).

Anyway, why should we be bothered about HMRC’s “secret unit”? Well, there are many reasons, not least of which let us take a look at how the “loan charge” debacle played out. The Revenue are starting to develop a reputation for not playing nicely. That said, we know that there has been a long standing review of the IHT system, and several looks at the taxation of trust. In my opinion this will just be an extension of that existing review, after all it would seem churlish to review trusts, but not the tax planning vehicle of choice for wealthy families that replaced them in their armoury. I for one will be very interested to see the outcome of any review!