HMRC’s Review of Family Investment Companies and their Use for Wealth Planning
In its simplest form, a Family Investment Company (FIC) is a facility that allows assets to be transferred to the younger generation while the older generation retains control of the assets and does not impose an Immediate Inheritance Tax (IHT). The use of an FIC is increasingly seen as a popular alternative to family foundations.
View of HM Revenue & Customs
In April 2019, HM Revenue & Customs (HMRC) set up a team to review the use of FICs. Back then it was said that teamwork was exploratory.
HMRC recently released its findings and concludes that it now better understands the characteristics of FICs and the use of these structures does not suggest that taxpayers who use them are not compliant in their tax affairs. Although the taxation of FICs has not changed much so far, new rules to combat tax avoidance may apply in the future.
FICs are now being converted to "business as usual" within the HMRC. Such companies do not need to be run by a dedicated team at HMRC.
Establishment of an FIC
An FIC is a private corporation controlled and administered by its directors, with family members, possibly including family trusts, owning stocks.
The FIC's Articles of Association can be adapted to meet the family's specific needs to create a vehicle tailored to their particular needs, often as an alternative to a family trust. The articles of association can be used to govern matters such as the appointment of directors, the distribution of profits, the return of capital, and the transfer of shares. This enables parents to maintain control of their assets, build an estate tax-efficient and simplify estate planning.
Parents can stay in control by subscribing for voting shares that give control of the company at the shareholder and board levels.
Parents can then choose to give their children non-voting shares or to give them monetary gifts to enable them to receive non-voting shares. Alternatively, parents could liquidate stocks or cash to subscribe for shares in trust in favor of their children.
While particular care must be taken in structuring, FICs are typically funded primarily through low capital loans from parent companies. The repayment of these loans from the cash and cash equivalents of the investments held by the company is tax-neutral. Only when their original loans are fully repaid will further withdrawals from the FIC create tax burdens for the parent companies.
FICs can also be tax-efficient vehicles by incorporating income into the corporate tax system rather than charging personal tax.
A company currently pays 19% corporate tax, which is generally lower than the income tax rates (the maximum rate is 45% / 46%). In addition, no corporation tax is payable on most dividends a business receives, and administrative and operating expenses are often deductible for corporation tax purposes when not incurred by individuals.
FICs are particularly efficient when profits are held in the structure for reinvestment. If the profits are withdrawn from the company, for example through dividends, the shareholder has to incur additional taxes.
Based on the current UK corporate income tax rate of 19% and an individual dividend rate of 38.1%, the effective tax rate on the FIC generated for personal use is 49.5%.
As of April 1, 2023, the corporate tax rate for FICs will be increased to 25%. After this change, the effective rate on dividends distributed as personal use dividends using current income tax rates will increase to 53.6%. The effective tax rate of 53.6% exceeds the current highest income tax rates in England and Wales of 45% and 46% for Scottish taxpayers, respectively.
The HMRC review implies that it does not consider the use of FICs as the more aggressive end of tax planning, although we will have to wait and see if we can achieve future changes to the taxation of FICs, especially if they are used to increase profits at tax rates. lower tax. While corporate income tax will rise in 2023, its use may still initially be an attractive option for parents or grandparents who wish to pass their assets on to the next generation and at the same time want to retain control of the assets.