HMRC team will focus on high net worth families, say experts

HMRC set up the Family Investment Companies (FIC) Unit last year. The team is tasked with conducting risk reviews of private companies used by family offices and high net worth individuals to manage their wealth, and making sure they are operating in line with UK tax laws.

HMRC are also likely to examine how FICs could be used as a means for ultra-high net worths to move assets offshore, for example by transferring assets to another company incorporated in a lower tax jurisdiction overseas.

Tax expert Steven Porter of Pinsent Masons, the law firm behind Out-Law, said: “The tax affairs of family offices and the use of FICs are the new frontier in HMRC’s crackdown on ultra-high-net worths.

“Setting up this new unit is a clear statement of intent – to ensure that HMRC maximises revenues from the UK’s richest families,” Porter said.

FICs allow ultra-high net worth individuals and families to exert greater control over their assets and investment strategy than by outsourcing the role to private banks and investment managers. FICs can also help families pass on assets and facilitate succession planning.

Porter said many wealthy families were moving away from the use of trusts to FICs due to changes to tax rules for trusts. In 2006 the UK government introduced a 20% upfront inheritance tax on most assets transferred into a family trust.

In contracts, funds paid into a FIC are not typically subject to upfront inheritance tax but instead taxes are only levied on the profits the company makes at the standard rate of 19%, or when capital is released.

“Using FICs makes sense in many cases. However, HMRC is clearly on the lookout and families need to ensure their affairs are in order. Tax investigations can take years and be very costly for those involved,” Porter said.

Tax expert Natalie Sherborn of Pinsent Masons said the longer-term impact of the new unit was still unclear.

“It remains to be seen if the Family Investment Companies Unit's focus on UK FICs will also result in an increased appetite to refer criminal offending, whether by the FIC or the ultra-high net worth individual, to the prosecution agencies for criminal sanction to send a strong deterrent message,” Sherborn said.