Family Investment Companies to save income tax and inheritance tax – problems ahead?

Family investment companies (“FIC”) are popular for three reasons. For clients, (i) they can reduce or defer taxes on income from 45% to 19% or less and (ii) give away wealth for IHT purposes but retain some element of control. For advisers, (iii) there are large fees, as such structures are complex and require detailed advice.

Advantage (i) is as a result of the continued fall in corporation tax rates, compared to higher income tax rates. Advantage (ii) is a response to the restriction on the use of trusts via the tax system in 2006. Advantage (iii) may tempt some to “sell” as many FICs as possible to clients, rather than it being part of an adviser’s toolkit, suitable in only some circumstances.

What could go wrong?

The challenges FICs face are:

  1. complexity – in many cases there is a more simple and cheaper solution than a FIC
  2. future tax rates change (companies were a very bad idea for private assets several years ago and may be again in the future)
  3. company law changes
  4. targeted legislation (see-through legislation taxing the income / apportionment rules?)
  5. existing settlement anti-avoidance legislation (if there is an element of bounty eg uncommercial loans) or transactions in securities (there are rumours of HMRC attack in this area)
  6. costs, administration and reporting requirements can be expensive or burdensome
  7. they are difficult to unravel (more so than trusts)
  8. publicity, unless an unlimited or offshore company is used to limit that
  9. will the press see them (rightly or wrongly) as the next tax dodge, resulting in penal taxes in response?
  10. double tax charge on assets that grow in value and are extracted
  11. family/shareholder disputes (getting the bespoke company articles and shareholder agreement right first time)
  12. unknown unknowns (FICs are a very young idea compared to the tested ground of trusts)

These should all be considered in detail before putting a FIC into place, ie not just the advantages now but how future-proof are they, what stress tests and “what ifs?” should be considered?

With that, a fully informed decision can be made. FICs can be very useful in specific limited circumstances but beware having one just because it is in fashion or that somebody wants to earn a nice fee selling you one.

[This note was drafted in December 2016, updated in March 2017 and February 2018]

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