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Don’t make an awful year even worse…Separation and Capital Gains tax
James Ward
Good news – The “secret” specialist HMRC unit set up in 2019 to examine the tax avoidance risks has been wound up after finding no evidence of correlation between the use of FICs and non-compliant behaviour.
The “secret” unit was created in 2019, when HMRC recognised that FICs had become an increasingly popular succession tool with high-net-worth individuals. The unit was to review the tax risks of FICs and in particular the associated inheritance tax (IHT) implications. The news of the unit only came to light following a Freedom of Information request, and its clandestine nature resulted in individuals reassessing whether a FIC was still an appropriate vehicle to set up and whether those who already had established FICs were going to be subject to attack by HMRC. However, since its creation little was heard about the unit or its activities.
Family trusts were the traditional vehicles used to achieve succession planning. However, FICs have become more increasingly more attractive over the last 10 years because of their structure and tax advantages.
A FIC is simply a private limited company that holds and manages investments. One of the main reasons for the use of a FIC is to protect family wealth for future generations in a tax efficient way. The benefits of a FIC are:
- Control - FICs are often established by a parent or grandparent, who will normally retain control of the company. Unlike a trust, the FIC’s Articles of Association can be specifically tailored to needs of the family to create a bespoke vehicle. The articles can determine matters such as the appointment of directors, distribution of profits, the return of capital and the transfer of shares. The corporate structure can allow for flexibility in voting, income and capital rights.
- Asset protection - The growth of the company would sit with other family shareholders (or even family trusts), entitling them to income or capital from the FIC. This enables parents to retain control over assets but the accumulation of wealth sits with children in a tax efficient manner.
- Flexibility – The structure can be amended as the family grows to allow for additional members.
- Tax – alongside the IHT benefits, FICs can also be tax efficient vehicles since they do not attract the initial 20% IHT charge and bring income within the corporation tax regime instead of the charge to personal taxes. A company will pay corporation tax at, currently, 19% which is generally lower than personal income tax rates. FICs are particularly efficient if profits are retained in the structure for reinvestment. There will be additional tax if profits are extracted from the company, for example by dividends.
There are of course disadvantages so the structure needs to be carefully considered.
HMRC has quietly wound up the specialist FIC team, subsuming it into a wider unit. FICs will now be treated as ‘business as usual’ by HMRC, rather than be subject to the scrutiny of a dedicated unit. However, the government does not rule out bringing into play anti-avoidance rules for FICs in the future, especially considering the various small changes to the taxation of companies in recent years.
There is no ‘one size fits all’, however FICs can act as an effective succession planning vehicle where the structure is appropriate. In the meantime, those with FICs or planning FICs can proceed with a sigh of relief knowing the HMRC’s general view now appears to be that FICs no longer pose an investigative threat.
Further information
If you would like to discuss the use of trusts and FICs for your succession planning or have any other questions about this blog, please contact James Ward or Diva Shah.
About the authors
James Ward heads the Private Client team at Kingsley Napley and is tasked with overseeing the continued development of the private client offering for both existing and new clients of the firm.
His objective is for the Private Client team to offer the highest quality legal, practical and commercial private client advice for both domestic and international families and individuals.
Diva Shah is an Associate in the Private Client team.
Diva acts for various clients including high net worth individuals, entrepreneurs, executors, trustees and individuals who lack mental capacity on a broad range of matters
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