The UK’s tax authority has created a secretive unit to investigate the use of family investment companies by the very wealthy to avoid inheritance tax, putting family offices with an estimated $1tn-plus in assets in its sights.
HM Revenue & Customs set up the team last April to target the issue of FICs. The creation of the new unit, which was not previously disclosed, comes amid growing concern about inequality and the perception that the wealthy avoid taxes by using sophisticated legal instruments.
FICs are increasingly popular with family offices as vehicles to hold stocks, bonds and other assets. Placing assets into an FIC means that tax on dividends, for example, is paid as corporation tax rather than personal income tax, benefiting from lower rates, according to lawyers. If parents establishing an FIC bring in children as co-shareholders, inheritance taxes can, in some circumstances, be reduced.
In a statement to the FT, HMRC said: “The Family Investment Company team was established . . . in April 2019 to look at FICs and do a quantitative and qualitative review into any tax risks associated with them with a focus on inheritance tax implications. The team’s work is exploratory at this stage and as such, we would not like to share any more details.”
Jason Collins, partner and head of tax at Pinsent Masons, an international law firm said: “HMRC is following the money. It will be concerned that family investment companies are taxed too leniently and that huge amounts of wealth might be held through them.”
Mr Collins added that tax officials may be concerned that FICs were being used to bypass the many anti-avoidance rules placed in recent years on trusts, once a popular tax-avoidance tool. “Family investment companies have slipped under the radar. That looks to be changing and we may see new anti-avoidance rules created for them.”
HMRC revealed the existence of the new investigations unit, which sits inside its Wealthy and Mid-sized Compliance Directorate, only after a freedom of information request was filed by Pinsent Masons’ public relations company. The authority defended its decision not to reveal details, saying doing so “would allow opportunistic individuals and would-be avoiders [to] identify where HMRC is devoting resources and arrange their activities to escape challenge”.
The latest initiative follows HMRC’s creation in 2009 of a high net worth unit, which focuses on the 7,000 or so people who have £20m or more in assets.