HMRC's family company investigation could uncover 'shadowy' practices

It was recently revealed that the UK's tax authority is investigating the use of family investment companies (FIC) by the very wealthy as a means of avoiding inheritance tax (IHT).

Beaufort Group co-founder and chairman Simon Goldthorpe said FICs, which are used to hold stocks and bonds to pass down between generations, were obviously tax avoidance vehicles at times.

"We see FICs that are not even close to trading - they are just avoidance mechanisms. We come across FICs, or advisers that are suggesting structures to FICs, which won't pass any of the ordinary tests that HMRC apply, but people still take the risk," he said.

"They know what the consequences are and if HMRC suspect that anything is close to deliberate they will murder them and with some of those structures - they are deliberate. Lessons have not been learnt in a lot of cases."

Goldthorpe, who has been advising on FICs for four decades, said it was common for families to mask residential lets as genuine trading entities, including buy-to-let properties.

"I think given the burden of IHT there is a temptation to try and use any kind of structure which is just a pure investment to mask that within a trading entity," Goldthorpe added.  

"We've seen some offshore stuff being used, which is clearly just a disguise. By their nature, they are a bit shadowy. Some of the structures that are put forward are quite shadowy."

James Hay head of technical support Neil MacGillivray said the HMRC investigation was aimed at recouping money from the super-rich through complex valuations of FICs and was unlikely to result in new tax laws. 

"The HMRC have got wide enough powers when it comes to assessing people over tax and collecting tax - I don't think they need to change legislation. But these arrangements can be very complex and issues such as valuing these companies is a very specialist field - I think that's why HMRC has set up a unit to investigate them," he said.

"It could be very profitable for the revenue to take a look at the exceptionally wealthy."

Goldthorpe added that it was crucial for advisers to be vigilant when dealing with investments of this nature, particularly when a member involved in a FIC dies.  

He said advisers should tell every single person involved with a FIC the following message: "You have to be prepared for a thorough investigation, particularly post any significant member's death, and if you don't think you can get through that level of investigation then you shouldn't be doing it."

He continued: "The IHT transference is a big trigger for HMRC to come back and look at FICs and start to unpick things and if you don't think with any confidence you are going to get through that then you shouldn't do it."

Schroders UK Intermediary Solutions director Gillian Hepburn said HMRC's investigation would compound the need for advisers to work across borders and with third-party specialists.

"The value of good quality financial advice cannot be underestimated and in particular where clients have complex requirements which may not be purely based on the amount of invested assets but also passing on property and business assets. Financial advisers therefore often need to co-ordinate across a range of third-party specialists such as solicitors and accountants and increasingly cross-border," she said.

A HMRC spokesman said results of the investigation were likely to be released in late summer to early spring.

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• Topics
• Tax-efficient Investing
• Beaufort Group Simon Goldthorpe
• HMRC
• IHT
• family office
• Gillian Hepburn