Family Investment Companies (FICs) have slowly become popular since the major change in the tax treatment of trusts in 2006.
Prior to that time, when a family wished to pass on wealth to the next generation of the family, but desired to retain some control over the assets, it was common to set up a family trust. The changes in 2006 brought these trust arrangements within the charge to Inheritance Tax so that a 20% tax charge is made on creation of the trust, and further charges were applied every ten years.
Since 2006 the FIC has become a useful alternative as there is no Inheritance Tax charge on their creation. In essence a FIC is a limited company which is established to hold family property for the benefit of future generations. Typically, Grandparents will introduce funds or assets to the company and will gift shares in the company to children and grandchildren. This normally occurs when the company value is low to avoid unwanted capital gains tax charges, but as the company grows over time and Grandparents withdraw their initial investment to live on, so the value in the company transfers to the benefit of all the family shareholders. The share structure needs to be considered carefully but it can achieve a flexible redistribution of income and capital under the control of the founder Grandparents until they feel confident to hand it on to the next generation.
In the light of their increased popularity HMRC set up a special unit in April 2019 to investigate whether these new arrangements were promoting tax avoidance. HMRC have recently announced the finding of this unit, and we are pleased to see that they have concluded that FICs are not being used for tax avoidance and the unit has been disbanded.
Care is still required in establishing FICs to ensure the desired tax profile is achieved, but this means that families can make use of FICs in their tax and financial plans with more confidence that they will not attract undue attention from HMRC.
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