Wealth managers concern ‘health warning’ over inheritance tax automobiles | USAEMALL.com

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Wealth managers have issued a “health warning” over the costs and complexities of investment vehicles designed to reduce inheritance tax.

It follows a flood of inquiries from affluent clients over setting up family investment companies, or Fics, to cut IHT after chancellor Rachel Reeves expanded the regime in the Autumn Budget last year.

“There are many clients for whom these will be too costly and complex, or where the assets under discussion are incompatible,” said Hazel Bowen, a senior wealth planner at Canaccord Wealth, one of the tax experts who has seen an increase in demand for Fics.

“There are reporting requirements and ongoing legal, accounting and financial advice and investment management costs . . . as well as complexities in valuing shareholdings.”

Nick Ritchie, senior director at RBC Wealth Management, who has also seen a “rush” of inquiries for Fics since the Budget, added: “These structures introduce additional complexity and higher set-up costs.” 

For example, capital gains realised by Fics are chargeable to corporation tax at up to 25 per cent — higher than the current maximum 24 per cent for individuals, he said.

Tax experts at RSM, Evelyn Partners and Blick Rothenberg also reported more clients considering these vehicles because of IHT fears.

The surge in demand follows the Budget announcement that from 2027 unused pension pots will be subject to IHT, which is charged at 40 per cent. Some landowners will be hit with a 20 per cent levy from next spring.

The advantage of Fics is that they can be used to store wealth and gift shares without incurring up front IHT charges as long as the benefactor lives for seven years after the transaction.

In addition, they provide different share classes enabling parents to control ownership of assets while children have economic ownership.

Bowen estimates that the setting up costs and standard fees make a fund of about £2mn a sensible minimum.

“For some wealthy clients with funds surplus to requirements . . . Fics can provide an effective structure to pass on wealth in a tax efficient and protected way to the next generation,” she said.

Nimesh Shah, chief executive of accountancy group Blick Rothenberg, added that Fics can make administration of assets for executors easier when dealing with estates of the deceased.

This is because they are placed in one account, avoiding the chore of handling multiple investment accounts.

“It’s not a panacea for everyone to mitigate IHT exposure, but it is certainly something that is becoming more of a factor,” said Chris Etherington, partner at accountancy firm RSM.

“They’ve [Fics] been around as a popular vehicle for 10-15 years but the last Budget has been a catalyst for accelerating people to enter these Fics.”