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:
- complexity – in many cases there is a more simple and cheaper solution than a FIC
- future tax rates change (companies were a very bad idea for private assets several years ago and may be again in the future)
- company law changes
- targeted legislation (see-through legislation taxing the income / apportionment rules?)
- 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)
- costs, administration and reporting requirements can be expensive or burdensome
- they are difficult to unravel (more so than trusts)
- publicity, unless an unlimited or offshore company is used to limit that
- will the press see them (rightly or wrongly) as the next tax dodge, resulting in penal taxes in response?
- double tax charge on assets that grow in value and are extracted
- family/shareholder disputes (getting the bespoke company articles and shareholder agreement right first time)
- 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]
In my experience, the most common tax return errors made by taxpayers are in ten areas:
- selling a property or other asset
- one-off interest on deposits (eg when long term investments mature)
- new bank accounts or investments
- payments/benefits/expenses from other company directorships
- temporary employments
- accrued income scheme interest on government gilts
- joint ownership of rental properties or other assets
- assuming low bank interest is the same as nil
- not realising child benefit can have a tax impact
- pension contribution misunderstandings
Good ways to spot or prevent these are:
- using the checklist of 10 items above, as a prompt
- getting the tax return done early (eg August to November, not December and January)
- checking your personal bank statements for unusual credits
- giving your adviser a full list of your assets, including non-income producing ones
- regular updates to your adviser of activity and transactions during the year
- not relying on just checking comparatives with last year – instead ask “what might have changed?”
- reconciling the tax due: why is it that figure? (eg PAYE overpayment due to benefit in kind change = £A; higher rate on dividends = £B; gift aid tax relief = £C; £A+B+C = tax due)
These help prevent unexpected tax, interest and penalties.
If you have submitted your tax return with an error, speak to us about how to correct this before HMRC spot it and to help minimise potential penalties.
Why we check ID
If you are a new client, we need to check your identification. If I’ve known you for many years, I still need to perform the same checks. This may seem odd but is a legal requirement. If I don’t do it, my firm is exposed to a penalty.
The legal issues are discussed in the case of N Bevan Ltd TC5404, where a penalty of £3,094 was imposed. It is worth a read.
How we do it
The usual way of undertaking ID is to take a copy of your passport or driving licence when I meet you. I may also need to confirm your home address electronically. If you have a trust or company we need to identify the trustees and ultimate beneficial owners. It is important that I fully understand your assets, business structures and transactions, under the anti-money laundering regulations.
If you are another firm of advisers, we still need your underlying client ID before we can advise you.
Updating the information
I may have to refresh the information every few years or when you undertake a transaction. This can be frustrating and cause delays but is important and a legal requirement.
Making it easier
Where I hope we differ from large firms is to make that process as easy as possible, by doing the checks myself and calling out to see you to collect the information.
Source of funds
We may also need to identify and ask you to prove your source of funds and wealth. The questions may feel intrusive but we are required to ask them by law. It may also lead to better advice by fully understanding your circumstances and history, even if not linked directly to the specific tax project.
Taking it seriously
But being a small firm does not mean that it is given a lighter touch. If you do not provide adequate ID and explain sources of funds, we will not engage you as a client.