Private Lives – The future of Family Investment Companies

In April 2019 HMRC established a specialist unit dedicated to investigating the use of Family Investment Companies (commonly known by the acronym FIC). A year on, we look at the use of FICs and their future.

It seems like a distant memory but you may recall a time before lockdown, ‘daily briefings’ and news of COVID-19 dominated the headlines. During this time it was reported that HMRC had set up a specialist unit dedicated to investigating the use of FICs. Little detail was provided at that time but we were told that the work of the unit was exploratory.

Until further information is made available, FICs remain good planning provided they are set up with the exclusion of artificial and aggressive steps and run as a genuine investment vehicle.

So what is a FIC? 

For those unfamiliar with a FIC, they are a vehicle used to separate beneficial ownership and control, sharing some of the characteristics of a trust and often viewed as an alternative. Although trusts have been commonplace for many years, their use has declined since the radical changes contained in the Finance Act 2006. This may, in part, explain the popularity of the FIC which, in contrast to a trust, has no limitations on its lifespan or the amount that can be invested. For many, a FIC also seems altogether more relatable and universally understood with a rulebook phrased in less ‘legalese’ language.

What does a typical FIC look like?

FICs are bespoke companies tailored to the needs of an individual family; rarely will two ever be quite the same. However, for illustrative purposes, let’s take a stereotypical family of parents and their two adult children.

Generally, a private limited company is incorporated with parents appointed as the first directors of the FIC. Adult children may subscribe for shares in the newly formed company, the subscription price being gifted to them by their parents. There may also be a family trust to hold shares for existing and future grandchildren.

The well-established ‘seven year rule’ applies to any gifts of cash made, after which point the value falls outside of the parents’ estates. Any growth in the value of the shares will also be outside of their respective estates.

If it is envisaged that children may become directors in the future, different classes of share may be created with the ‘voting’ shares held by the parents and ‘income’ shares by the children and grandchildren. The latter approach presents an extra layer of complexity in that the valuation of those shares will need to be agreed with HMRC, an area where we are already seeing challenges made.

The FIC will have bespoke articles of association and often a shareholders’ agreement, the latter requiring signature as a prerequisite to becoming a shareholder to give clarity and certainty over issues such as transmission of shares and directorial control.

FICs are used for long-term planning with income and gains accumulated within the FIC thereby reducing the impact of the double layer of taxation. It may also be possible to reduce the impact of the double taxation by directing dividend income to shareholders who are lower rate tax payers.

The future of FICs

Once reserved for ultra high net worth individuals, FICs have become the structure of choice for an increasing number of families in recent years, but what next for the future of FICs?

A year on, we still have no information from HMRC as to the state of their review in this area, although the impetus to create a specialist unit is indicative of HMRC’s attitude.

There is, in principle, nothing wrong with setting up a company to provide for future generations. This does not depend on exploiting loopholes in current legislation. In fact, many families are driven by non-tax benefits such as wealth protection, ability to control the investments and financial education of children and future generations.

However, given the economic collateral damage of Covid-19, we should expect taxes to rise, particularly in areas where HMRC may consider the current position generous. This will need to be balanced against the need to help businesses on the road to recovery. With this in mind, one possibility may be to tax investment companies at higher rates rather than increasing the rate of corporation tax generally. Changes may also come as part of the recent Office of Tax Simplification review, discussed in the previous edition of Private Lives, in the form of a lifetime gift tax. 

In the meantime, until further information is available, keeping the share structure of a FIC simple should limit the risk of HMRC investigation.

This article is from the Summer / Autumn 2020 issue of Private Lives, our newsletter covering the key legal and tax issues that individuals face. To download the latest issue, please visit the newsletter section of our website. Law covered as at August 2020.

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