HMRC closes down unit investigating tax avoidance risk in FICs

Monday, 02 August 2021
A specialist unit set up by HMRC to examine the tax avoidance risks posed by family investment companies (FICs) has been wound up after finding no evidence of correlation between the use of FICs and non-compliant behaviour.
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The unit was created in 2019, when HMRC recognised that FICs had become an increasingly popular succession tool with high-net-worth individuals (HNWIs). Family trusts are the traditional vehicles used to achieve this objective, but according to tax consultants RSM UK have become less popular since 2006 when the law was changed to impose a 20 per cent up-front inheritance tax (IHT) charge when establishing a trust. Since then the number of taxpaying trusts in the UK has fallen from about 220,500 to 151,000, the firm notes.

FICs do not attract the initial IHT charge. 'An FIC is simply a company, typically set up in the UK, which holds investments that would otherwise be held by family members personally,' says Chris Etherington, Partner at RSM UK.

The FIC is often established by a parent or grandparent, who will normally retain control of the company and therefore of the company's assets, although their taxable estates are reduced because their shares carry no economic rights, only voting rights. Other family shareholders will hold shares in the FIC, entitling them to its income or capital on a winding-up, but they are not in control of when they receive any profits.

When the existence of the HMRC unit came to light it attracted much expert comment around the concerns that HNWIs might have about setting up such a vehicle, as well as about the imposition of HMRC investigation of existing FICs.

HMRC has now published the findings of the unit. According to accounting firm Saffery Champness, HMRC concludes that ‘it now has a better understanding of the characteristics of FICs and the use of these structures does not suggest those taxpayers that use them are non-compliant when it comes to their tax affairs.’

FICs will now be treated as ‘business as usual’ by HMRC, rather than be subject to the scrutiny of a dedicated unit.

RSM UK and Saffery Champness both note, however, that the government does not rule out bringing into play anti-avoidance rules for FICs in the future.

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