It is easy to think that the story of the Family Investment Company (FIC) begins, as with many corporate investment ventures, with the historically low rate of corporation tax. Added to this, no tax on qualifying dividends received by the company, incentives created to draw corporate investment to the UK, the ability to transition (sometimes tax-free) from trading to investment on a disposal and the potential for a tax-free uplift of value when selling offshore assets to the company, and an FIC can make a very attractive proposition for UK resident and domiciled individuals and non-resident or non-domiciled individuals alike.
However the main incentive to create an FIC came about in 2006 with the introduction of the related property regime that applies to trusts for inheritance tax purposes. In appropriate circumstances an FIC can be tailored to offer almost the same benefits as a trust without the IHT disadvantages including lifetime entry, exit and 10 yearly charges. Naturally, this led to some suspicion on the part of HMRC. Was this structure being abused to avoid IHT? A specialist team was established in April 2019 to investigate these suspicions, specifically those regarding FICs and IHT. This was unsurprising given that the structure has proved widely popular and effective in mitigating tax. However, it seems that the FIC is here to stay and the specialist team has been wrapped up after announcing that FICs gave rise to no “non-compliant behaviour”. No specifically targeted anti-avoidance legislation has been announced. Again, this is unsurprising given HMRC’s existing wide and effective array of tools for policing and punishing tax avoidance.
"...an FIC is becoming an attractive means of consolidating and preserving a family’s shared wealth..."
It should be noted that many caveats do exist when considering the use of FICs. It is important not to be draw too much from the exciting headlines. For example, for taxpayers immigrating to the UK the tax-free uplift I mentioned earlier comes with a number of critical considerations. The “bed and breakfasting” rules for certain assets and the rules that deem consideration to be otherwise than at market value must be properly adhered to, and the ongoing tax implications need to be considered in light of the potential application of the offshore anti-avoidance rules such as those under the ToAA regime and TGCA 1992 s.3.
Now, FICs may be all well and good for UK residents and UK-domiciled individuals, but what about those who have a non-UK residence or domicile? Does the FIC hold any value for those people? In short, it does! While the nuances of the various configurations of UK or offshore residence, domicile and deemed domicile require careful consideration, there are some clear benefits of an FIC to a taxpayer with the right circumstances.
A UK-domiciled individual looking to make gifts that are Potentially Exempt Transfers in excess of their available nil rate band and over which they wish to retain control may still find an FIC appropriate, if they are non-resident and have non-resident beneficiaries. It may be advantageous to locate the FIC in a suitable offshore jurisdiction. A non-domiciled but UK-resident individual, who is concerned about losing their non-domiciled status might choose to base their FIC in the UK to avoid the need to interact with the offshore anti-avoidance regime. This does require careful thought. Shares in an FIC incorporated and registered outside of the UK should be excluded property and lie outside the scope of IHT. One option is to incorporate the company outside the UK and maintain central management and control within the UK and making the FIC UK tax resident for the purpose of income tax and CGT but not for IHT.
As families become more mobile and international, an FIC is becoming an attractive means of consolidating and preserving a family’s shared wealth. Whilst the UK may be the current jurisdiction of residence for the family, that may change in the future as family members move abroad. An international FIC may be more suitable as it can become dual resident in the future when family members are no longer UK tax resident. However, please note that this is not a cost free option; there are exit charges. Nevertheless FICs can provide flexibility and security for future generations, especially in families that are international or intend to be so in the future.
In summary, the FIC is a familiar and easily comprehensible structure that appeals to many people in a way that a trust, particularly an offshore trust, with connotations of legal complexity and poor public image, may not. Where a corporate structure provides better understanding and familiarity, it can offer more confidence and more accessibility for future generations, something which is crucial for an entity intended to be passed down over the years to people not even born when it was established.