HNW Individuals -UK TAX SCRUTINY
Advisors Warn Family Offices, HNW Individuals Over New UK Tax Scrutiny
Tom Burroughes, Group Editor , London, 25 February 2020
The UK's tax authority last year created a new group to examine what are called Family Investment Companies, which come with a specific tax status. HMRC is seeking to ensure that these entities aren't being misused.
Controversy has erupted about a recently-launched official UK organisation examining the companies used by family offices and high net worth individuals. HM Revenue & Customs told this news service yesterday that there was, contrary to some media coverage, nothing secret about what is called the Family Investment Companies Unit.
As described by UK accountancy firm Pinsent Masons, the unit reviews private companies, and says these are “often used by hedge fund managers, business owners and recipients of large inheritances”.
“Family Investment Companies are popular amongst ultra-high net worth [individuals] and families because they allow for greater control over 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,” the firm continued. It said that the HMRC unit will work out whether FICs comply with UK tax laws.
The volume of wealth at stake is large, the firm said, saying (based on a 2016 report from the Family Office Council) that there are 1,000 family offices in the UK, overseeing more than ￡700 billion (about $1.0 trillion) in assets. (This news service works with Highworth, an organisation tracking single family offices in Europe and other regions, and has written about the estimated size of the total market. Exact figures are not easy to pin down and estimates vary. To register for the Highworth database, see here.)
“The tax affairs of family offices and the use of FICs are the new frontier in HMRC’s crackdown on ultra-high net worths,” Steven Porter, partner at Pinsent Masons, said in a statement yesterday.
“Setting up this new unit is a clear statement of intent – to ensure that HMRC maximises revenues from the UK’s richest families.”
Changes to tax rules surrounding trusts have also made them a less attractive vehicle for holding and managing assets compared with FICs. In 2006 the government imposed a 20 per cent upfront inheritance tax on most assets transferred into a family trust, it added. Unlike trusts, funds paid into a FIC are not typically subject to upfront Inheritance Tax. Taxes are only levied on the profits that the company makes at the standard rate of 19% or when capital is released.
HMRC said that the FIC team was set up in April last year 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”.
Stephanie Parker, trust director at haysmacintyre commented: “It may be that HMRC is considering whether the normal valuation models are appropriate in Family Investment Companies, and whether the levels of discount applied in a family situation should be reviewed. The Family Investment Company unit may also be considering the value of a parent’s right to vote, even if they give away all of the income and capital rights.”
“HMRC will also be looking into the possibility of there being transfers of value between parents and children through changing the rights of shares after they have been issued – these could immediately be chargeable to inheritance tax, so any changes must be approached with due caution,” Parker continued.
“Those considering setting up a Family Investment Company need to be aware of the risks of any changes in legislation or in HMRC practice and consider how they would deal with this from the outset. It is essential to get the right classes of shares issued to the right people from the outset, as changes at a later date can be difficult to achieve and give rise to risks of extra tax charges,” she added.