Category Archives: Risk

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:

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]

Common tax return errors

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.

Who are you? Why we check client ID

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 (see “additional information” below). It is important that I fully understand your assets, business structures and transactions, under the anti-money laundering regulations.

If you (our client) 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.

Additional information – trusts

Where a trust is involved we will need need ID on the settlor (if still alive), trustees and main beneficiaries. This may also include national insurance numbers, to assist with trust register updates. We will also request a family tree, copies of the trust deed(s) and documentation provided to HMRC on the trust’s creation (eg inheritance tax returns, 41G or trust registration).

Additional information – companies and HMRC tax clearances

For HMRC tax clearance applications (eg demergers, new holding companies, company purchase of own shares), we will need:

Approximate values of the business(es)
Companies House reference number
Corporation tax reference number
Brief history of the business and future plans
Names, addresses, UTRs and NI numbers of shareholders and photo ID
Classes of shares
If there is a shareholders’ agreement
Relationships/connections between the shareholders
Latest management accounts
A brief note of the commercial advantages of the transaction, from the point of view of the businesses (not the shareholders)