The use of large up-front fees and disproportionate deposits has already resulted in significant cost consequences for one care provider.
It is not hard to see why. The relevant property regime for trust taxation is seen as restrictive. It limits what can be settled on trust without attracting an inheritance tax charge, and can apply further inheritance tax charges - which may seem unfair and almost arbitrary to the public at large. Rates of other taxes incurred in the course of trust administration are high, therefore an FIC might be far more tax efficient. It may not be so limited regarding the value that may be held and – perhaps more importantly to some people – it may allow greater discretion for investment and control of wealth.
In recent years the FIC seems to have enjoyed a boom in popularity, seemingly driven by investment managers who appreciate a structure which enables their clients to invest more funds, not have to comply with the restrictions of trust investment legislation and still have the scope for tax planning.
How should a FIC be viewed in the context of estate planning? Despite the perceived advantages of the FIC over more traditional trust planning models, should clients really be choosing an FIC over a trust? An FIC can be a very useful part of a client’s overall planning strategy, but discounting the downsides of using an FIC and ignoring the benefits of using trust planning in addition to (or sometimes even instead of) an FIC risks missing planning opportunities.
It must be remembered that an FIC is not intrinsically a vehicle for inheritance tax planning, but a structure that may enable such planning if the FIC is used in a particular way. It is vital that a coherent strategy for the future of the FIC is established at the outset to ensure that planning is efficient; this means that the FIC creator must be clear about their goals. Furthermore, it is vital that the strategy should be carried through. If, for example, the proposal is that the creator of the FIC will give away shares on a rolling seven-year basis, matters need to be monitored to ensure that this happens and that it is conducted in a fashion appropriate to the circumstances and tax issues of the time.
The FIC is a useful yet complex tool that should be approached carefully. The tax considerations around forming and administering an FIC are broad and must be considered closely. Running an FIC carries with it the same accounting, tax and legal compliance matters as with any company. People with experience of running their own businesses may find comfort in the familiarity of this, as opposed to the sometimes arcane terminology surrounding trusts.
Trusts have always been a useful vehicle for inheritance tax planning and continue to have an important place in client affairs, not least for gifting and the preservation of family wealth. As with any planning, a wide consideration of circumstances and objectives, coupled with exploring the structures and strategies that may help meet them, should lead to the most satisfactory outcome. An FIC may well be part of the solution, but this very much depends on the needs of the particular family.
For more information, please contact James Hall.
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