Rethinking taxation of work

Over the past few years, there has been an increase in the number of family investment companies (FICs) being established.

Why might families use FICs?

Under current legislation, a company offers certain tax efficiencies and flexibility. A FIC can facilitate succession planning. In addition, profits realised on investments will be charged to corporation tax.

With corporation tax rates currently lower than income tax and capital gains tax rates, it allows those profits to be retained and reinvested within the FIC at a lower tax rate than for an individual.

The government has announced that there will be an increase in the corporation tax rate from April 2023. This may impact FICs in the future, particularly if they fall within the definition of a close investment holding company, as such companies will not benefit from the small profits rate or marginal relief.

The FIC is permitted to deduct certain business expenses, such as management costs and professional fees, salaries and pension contributions.

In addition, certain income, such as qualifying income from company shares, should not be subject to tax in the FIC.

What is HMRC’s view of FICs?

In April 2019, HMRC reviewed FICs because of their increasing popularity. As reported in the minutes of the May 2021 meeting of HMRC’s Wealthy External Forum, this review has now been completed. The main conclusions that HMRC found were as follows:

• the changes in trust legislation and the related cost of using a trust has resulted in less taxpayers using trusts to hold family assets;
• FICs have become more popular than trusts since they are much easier to set up. Generally, the shareholders of FICs are made up of two generations – they often have multiple classes of shares and the older generation tends to retain the voting control;
• FICs generally hold investments, which would include stocks, shares or property;
• the assets compromised in a FIC were on average worth £5m; they are used by wealthy taxpayers (HMRC’s criteria for those taxpayers dealt with by its Wealthy Team is annual income over £200,000, or those with wealth of over £2m);
• FICs are not used extensively by the ‘very wealthy’, who would use a family office to manage their wealth;
• HMRC did not see evidence of non-compliant behaviour by those taxpayers who use FICs;
• FICs were often used to enable wealth to be passed down to the next generation and to mitigate inheritance tax;
• there are some differences in the way that FICs are managed, which leads HMRC to conclude that there are tax risks across a number of taxes (including inheritance tax, capital gains tax, stamp duty land tax and corporation tax);
• there will be no dedicated team within HMRC’s Wealthy Team to deal with FICs; and
• although one cannot rule out any specific legislation that might arise in the future, HMRC accepts that there are often commercial reasons for establishing FICs.

Overall, HMRC has a better understanding of the way FICs operate and the reasons why they have been established.

About the author

Mark Levitt, Partner, Blick Rothenberg, and a member of the Tax Faculty’s Private Client Committee