News of a ‘secret unit’ set up to look at Family Investment Companies (FICs) has been circulating in the national press.
HMRC quoted in the FT said that its purpose is:
“to look at FICs and do a quantitative and qualitative review into any tax risks associated with them.”
Their focus? “Inheritance tax implications.”
As usual there is a risk of over-reaction for anyone engaged in this type of planning. At this time there is no confirmation that HMRC will look to enact legislation changes or whether they believe they can clawback taxes mitigated by such planning. The quote from HMRC continues:
“The team’s work is exploratory at this stage and as such, we would not like to share any more details.”
I was recently asked if this now not-so-secret unit is expected to have any impact on our recommendations to LT4L landlord clients.
The short answer is no.
This is because we do not generally advise portfolio landlords to adopt Inheritance Tax (IHT) planning tactics commonly used by FICs.
Such tactics used by landlords to reduce IHT may include:
- transferring an estate into a limited company and then gifting company equity to children
- employing ‘freezer shares’ to pass on the value of future capital growth to the next generation
Essentially FICs aim to pass on wealth to the next generation before the death of the parents.
This is not something that happens in a typical Hybrid Business Model or Mixed Partnership (LLP) business structure where the shares are not passed on until death.
(This is the type of flexible business structure used by much of our client community.)
It is also worth noting that the recent press on FICs has also been inaccurate.
Many of the articles refer to tax advantages obtained by investments held in FICs and how these ‘attract Corporation Tax instead of personal Income Tax’. This is nonsense as when a UK company is paid a dividend from another UK company there is NO Corporation Tax to pay. This is to avoid double taxation. The tax has already been paid by the UK company that first generated the profits BEFORE it paid the dividends.
After a company has received a dividend, should its human shareholders decide to take the money out of the company as a dividend, then dividend tax would be paid by the human shareholders at their own marginal rates.
In that way any advantage gained by holding company shares in a limited (investment) company is simply one of timing – delaying the point at which tax will ultimately be paid.
FICs may look to remove IHT from the picture, but if the children eventually decide to spend the money then they will incur the taxes that apply for drawing money out of a company at that time.
This raises an important point – rules change – and the government is not afraid to change the law. As with any tax planning and as highlighted by this ‘secret unit’, FICs are subject to the risk of future changes or challenges where HMRC feel boundaries have been breached.
Chris Bailey, Chartered Accountant and Less Tax 4 Landlords Group Director stated:
“This is a ridiculous report & shows the inaccuracy of the press.
ANY company that receives foreign dividends pays tax on them at Corporation Tax rates.
ANY company that receives UK dividends receives them free of tax.
ANY company gets relief for mortgage interest.
ANY company can have shares owned by children.”
Chris also commented that
“In a typical LT4L Hybrid business structure the shares are only passed over to the younger generations on the death of the older generation.
The FIC is different as they are set up to pass shares & value down to younger generations prior to the death of the parents/grandparents.”
Related: “Are HMRC Finished with Landlords?” – Interview with Chris Bailey
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Less Tax 4 Landlords is a specialist multi-disciplinary consultancy service that helps portfolio landlords maximise the commercial benefits of building, running, and growing a recognised professional property business. This is achieved by housing the following services under one roof: Business Planning, Tax Consultancy, Legal Work, Accountancy, Business Succession Planning, Personal Estate Succession Planning and at arm’s length, Financial Advice. By bringing together a wide range of services and expertise, we help you to maximise the value of your business both today and during your lifetime, and to create true inter-generational wealth.
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