When to use a Family Investment Company (FIC) and where to locate it is predicated upon the residence and domicile status of the person in question – that is whether they are UK-resident or not, and whether they are UK-domiciled (or deemed UK-domiciled) or not.
A non-resident, UK-domiciled individual is still liable for IHT on their worldwide assets, despite no longer living or necessarily spending a great deal of time in the UK. Furthermore, even attempts to change their domicile are in practice uncertain, difficult to test and easy for HMRC to challenge. Here an FIC could become a useful estate planning tool, if it can be incorporated, managed, and controlled outside of the UK. If the individual is non-domiciled, it could lie outside the UK tax regime entirely provided that it does not hold an interest in UK land. Similarly, if the person has failed to change their domicile and provided that the shareholders and directors of the FIC are non-UK resident, there should be no adverse income tax and CGT implications and they will still have mitigated their IHT exposure. Shares in the FIC retained by the UK-domiciled individual will still count towards their estate for IHT purposes, although they should beware of a reserving a benefit in shares or interest in the FIC which they give away.
"...there are many situations in which domicile can be hard to test and easy to challenge..."
For those who are in the opposite position, resident in the UK but domiciled elsewhere, the situation is similarly reversed. They are subject to IHT only on UK-situs assets and UK residential land. The concern here is often that a person might become domiciled at a time when they are unwilling to leave the UK or reluctant to lose control over or access to income or capital. For these people, an offshore FIC may seem a natural fit, allowing mitigation of IHT without forcing a move overseas. As always, however, the anti-avoidance code, particularly the Transfer of Assets Abroad rules, must be heeded, and whilst defences do exist where a transaction is commercial and/or has no tax avoidance motive, navigating these rules can be very difficult. An FIC is a long term succession planning structure. Practical factors such administrative ease should be weighed carefully against any, perhaps marginal, tax advantage that might be gained by an offshore location.
What of those whose domicile status is unclear? As referenced above, there are many situations in which domicile can be hard to test and easy to challenge. These situations can include those involving the UK resident children of parents or grandparents who migrated to the UK or long term residents with no clear intention to leave. HMRC may also argue that a returning non-dom never acquired a foreign domicile at all and remained UK-domiciled throughout their time outside the UK. Therefore, it may be useful to simply side-step the entire question through the use of an onshore FIC. It can be structured to avoid loss of control and potentially offer access to income, and the seven year period before a potentially exempt transfer will be exempt from IHT can be undertaken when the founder is young enough to insure against an unexpected IHT charge.
Formerly domiciled residents (FDRs) are deemed domiciled in the UK for IHT purposes from the beginning of their second year of residence. FDRs are born in the UK with a UK domicile of origin. They have a non-UK domicile of choice and were UK resident in one of the two previous tax years. These individuals are in a precarious situation with regards to tax planning, as most of their previously existing structures will be ineffective. Trusts and offshore structures which were previously excluded will almost universally fail when the FDR becomes deemed domiciled. Also, it needs to be noted that while IHT has a one-year grace period, income and CGT apply immediately upon becoming UK-resident, so any planning done in this year may be subject to CGT. An FIC could potentially help in this situation, holding the assets which the FDR gifts before or during their first year of UK residency.
Non-returning non-doms may face the same considerations if they are resident in the UK for 15 out of 20 years. Again it can sometimes be difficult to determine precisely when this test is met. An FIC may also represent a viable estate planning tool to hold UK residential property investments.
There of course many other points, tax and non-tax, to consider but the residence and domicile status of those intending to set up or utilise an FIC is of vital importance in determining how they can be most effective in planning and managing wealth, especially with regards to succession planning. However where this may be unclear, an FIC can offer a flexible and effective estate planning tool alongside the other options available.