Why are HMRC interested in Family Investment Companies?

In 2009, HMRC set up a High Net Worth Unit to investigate those taxpayers that worth up to £20million. That’s around 7,000 people. A recent Freedom of Information request made by Pinsent Masons’ PR Company found out that there is also a new unit within this HMRC department called the ‘Wealthy and Mid-sized Compliance Directorate’. Their job is to focus on those using Family Investment Companies to get round certain tax laws. The name implies an expansion of their remit to go beyond just those with the most wealth.

What are Family Investment Companies?

Family Investment Companies (FICs) are legitimate financial structures that are popular with family offices. They are a place to contain bonds, stocks and other assets.

Obviously, there is an increase in the use of this system because there are some financial benefits. For example, if the parents of the family include their children as shareholders, they can secure a reduction in inheritance tax – if other criteria are met. Another example is in the taxation of dividends under Corporation Tax regulations, rather than as personal income tax. As the former is a lower rate, less tax is paid overall.

Some experts say that the rise in the use of FICs is because of a crackdown on Trust regulations, which were previously seen as a way to avoid paying tax.

What’s the problem with this new HMRC investigation focus?

Some are saying that the fact that it is a somewhat secret unit is, by definition, suspicious. But, as with any investigation into possible wrongdoing, if its means are revealed it gives perpetrators the opportunity for a cover up.

What’s HMRC saying?

HMRC told the Financial Times: “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.”

As to the challenge of secrecy, they said publicity “would allow opportunistic individuals and would-be avoiders to identify where HMRC is devoting resources and arrange their activities to escape challenge”.