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Mansion Tax at £1.5m: A Wider Private Wealth Issue

The Government’s proposed “mansion tax” may be on the verge of expanding out and affecting the wider property market. 

The High Value Council Tax Surcharge or HVCTS as it is so delicately named, due to take effect from April 2028, is currently aimed at owners of residential property in England worth £2 million or more. Reports ahead of the October Budget, however, suggest that the Government is now considering reducing that threshold to £1.5 million.

This is not as minor a change as it might appear. If the threshold does fall, the significance would go well beyond simply bringing more properties into scope for this specific new tax. 

A broader group of London homeowners could be affected

At £1.5 million, the charge would reach much further. That matters because many properties at this level, particularly in London are not necessarily owned by individuals with large amounts of readily available cash. They may be long-held family homes which have increased substantially in value, investment properties, or assets forming part of a wider family estate.

The result is that a lower threshold could turn what was initially perceived as a tax on the very top end of the market into a much broader private wealth issue. And because liability sits with the owner rather than the occupier, the implications extend beyond owner-occupiers.

Investors, trustees, executors and families holding residential property through more complex ownership structures will also need to consider whether properties fall within the regime and who ultimately bears the cost.

Valuation and ownership will matter more

For properties close to a threshold, valuation is likely to become particularly important and possibly even a contentious issue. 

A relatively small difference in value could determine whether a property falls outside the regime, enters the first charging band or moves into a higher one. But valuation is only part of the picture.

Private clients may also need to consider how the surcharge interacts with trusts and estates, ownership structures, succession planning and the wider cumulative tax cost of holding high-value residential 
property.

For a family estate containing several residential properties, or where a valuable home represents a significant proportion of an individual’s wealth, an additional recurring annual charge may influence longer-term decisions about how property is owned, retained or eventually passed on. There is also the additional impact that this might have on decisions around adding value to an existing property and the impact that has on the building and decorating sectors of the economy. 

The October Budget may ultimately leave the £2 million threshold unchanged. But if it falls to £1.5 million, the more important question will not simply be how many additional homes are caught.

It will be which owners are caught, how those properties are held, and what another recurring property tax means within the wider management of family wealth.

One final takeaway: what other impacts might this have on tax revenue as property values could be diminished, impacting SDLT, capital gains tax and inheritance tax receipts. Watch this space.

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Digital Legacies – Succession Planning in the Information Age

The European Law Institute has now published Model Rules on Succession and Access to Digital Remains.  Jack Burroughs, from Quastels’ Private Wealth and Tax team, represented STEP (The Society of Trust and Estate Practitioners) in this project.

The difficulties of a digital legacy

Those who die increasingly leave behind a large variety of digital remains.  From files on a person’s own devices, to cloud storage and online accounts stored remotely, to entirely new forms of asset like cryptoassets, these may have significant financial or sentimental value.

However, the law has been slow to catch up in this area.  The ELI’s Model Rules are therefore an important and very welcome development.

Some of the confusion around the legal treatment of digital remains has arisen from attempts to treat all of these disparate things in the same way.  The Model Rules have avoided this by recognising a clear distinction.

On the one hand, there are things that can be controlled and transferred (such as cryptoassets), which are referred to in the Model Rules as ‘digital assets’.  On the other hand, there are those things intrinsically linked to a person’s personality, identity or private life (such as digital files and online accounts, or even AI chatbots trained on that individual), which are referred to as ‘personal digital remains’.

These two different types of digital remains present different legal difficulties, and so the Model Rules set out two separate legal regimes to deal with them.

Digital Assets

There is a lack of certainty in some jurisdictions as to whether digital assets are subject to property rights, and subject to succession law upon the owner’s death.  The Model Rules deal with this problem by confirming that digital assets will be subject to the succession law that would apply to moveable property.  The question of which succession law applies will be determined by the applicable private international law.

In addition, the Model Rules require service providers to provide mechanisms and rules to ensure the orderly transfer of digital assets.  For example, this would require a cryptoasset custodian to have systems in place to be able to transfer control of the cryptoassets it holds for a deceased person to the relevant personal representative or heirs.

However, in cases where a person has self-custody of their cryptoassets, there will be no service provider to assist, and so it is important for such individuals and their advisors to ensure they have an adequate cryptoasset succession plan to ensure the right people will gain access to their private keys at the right time.

Personal digital remains

A major problem in digital legacy planning has been dealing with personal digital remains.  Treatment varies between jurisdictions, but typically these are not regarded as subject to property or succession law.   Though less of a problem when it comes to files and information stored on a deceased person’s own devices, often many personal digital remains will be under the control of third parties such as email hosts, cloud storage providers, or social media companies. In such cases, heirs and personal representatives may be at the mercy of the contractual terms and policies of overseas tech companies, which are rarely designed with succession planning in mind (see for example STEP’s comparative study).

Other jurisdictions have provided solutions, such as the legislation based on the Uniform Law Commission’s Revised Uniform Fiduciary Access to Digital Assets Act enacted in most states of the USA.  However, this will generally not assist European residents.

The Model Rules would therefore be of great benefit in this respect. They work on the basis of a right of access, rather than attempting to apply succession law, and they empower the individual to decide what happens to their personal digital remains upon death.  This means that they may choose to direct the deletion of certain things, or to explicitly nominate other people to have access.  In the absence of specific nomination, the heirs and personal representatives will have the right of access.

There are provisions for the protection of third party interests, including the right to request access where a legitimate interest can be demonstrated, or to request restrictions on access where rights are threatened. Furthermore, there are also provisions to resolve disputes between those entitled to access.

Crucially, these rules would take priority over any contractual terms, except where a service provider can prove such terms were individually negotiated with the deceased person. They would also require service providers to preserve personal digital remains for at least five years, unless the deceased explicitly directed otherwise, or the persons entitled to exercise the access right request deletion.

As time goes by, digital legacies will be of increasing financial and sentimental importance, and therefore it is vital that planning is not hindered by unclear law and inconsistent terms of service.  Hopefully therefore the UK will move to enact legislation based on these Model Rules.

A version of this article originally appeared on the ELI’s website.

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No such thing as a quick FIC(s): the long term view of a Family Investment Company

A recent Telegraph article referred to Family Investments Companies (FICs) as a ‘little-known alternative to trusts’ that could reportedly help people ‘dodge’ inheritance tax. Contrary to this belief, FICs are not so ‘little-known’ amongst its key audiences, having grown significantly in popularity over recent years as a flexible and potentially tax-efficient vehicle for holding and growing family wealth.

Once a niche structure used by only the wealthiest families, demand for FICs has been on the rise since 2006, and as an alternative to the once all-powerful trust structure. However, more so than for its ‘tax-dodging’ profile, the benefits regarding wealth preservation and intergenerational transfer are far more crucial factors behind a FIC’s increasing appeal.

What is a Family Investment Company?

Not defined in statute, in simple terms a FIC is a private limited company owned and controlled by members of the same family, primarily to hold and manage family investments, with an appropriate governance structure built in. There are, of course, family trading companies but these are not the focus of this article.

A key feature of a FIC is often its flexible share structure. In addition to ordinary shares, a FIC typically issues multiple classes of shares, allocated to different family members across different generations. These might include:

• Ordinary shares, carrying full voting rights and economic participation;
• Growth shares, designed to capture future appreciation in the value of the company;
• Freezer shares, which fix the current value of the founder’s interest, allowing future growth to accrue to younger family members; and
• Redeemable or exclusive shares, tailored to specific family arrangements.

A FIC share structure can therefore allow value and control to be separated. Senior family members — typically the founders or parents — can retain voting control and access to income through their share class, whilst transferring economic growth to children or grandchildren through a different class of shares.

How is a Family Investment Company taxed?

The taxation of a FIC needs to be considered across four stages:

• Creation: Funding a FIC with cash is generally the most straightforward approach from a tax perspective. Transferring assets into the company can trigger capital gains tax (CGT) if the asset has appreciated in value, and stamp duty land tax (SDLT) where real estate is involved. Inheritance tax implications may arise depending on how the shares are structured and who holds them, and professional advice is essential at the outset.

• Lifetime Taxation: Once established, the FIC pays corporation tax on its income and gains. Following the increase in rates of corporation tax, FICs no longer enjoy as large a tax differential over personal rates as they once did. However, for investment income — particularly dividends received from other UK companies — the corporate inter-company dividend exemption can make a FIC highly efficient, as such dividends are generally received free of further corporation tax. Capital gains within the FIC are taxed at the corporation tax rate. Investment income and gains that are retained and reinvested within the FIC benefit from compound growth at the lower post-tax retained rate compared with investments held personally.

• Extraction of Value: How value is extracted from a FIC affects the overall tax efficiency of the structure:
  • Dividends: subject to dividend income tax in the hands of the recipient shareholders (assuming they are UK resident);
  • Salary: where family members work for the FIC, a salary can be paid and will be deductible against the company’s profits, though it will be subject to income tax and National Insurance in the usual way;
  • Loan repayment: where the FIC was funded by a shareholder loan, repayment of that loan is not an income event and can be a tax-efficient means of extracting the original capital;
  • Capital distributions on winding up: generally subject to CGT, with the benefit of any available reliefs.

• Winding Up: On a winding up, distributions to shareholders are generally treated as capital receipts, potentially attracting CGT. Planning the eventual exit from the structure — including consideration of Business Asset Disposal Relief and holdover relief, where available — is an important part of the overall strategy.

Family Investment Companies and Succession Planning

Some of the most compelling characteristics of a FIC as a succession planning tool center on its versatile nature:

• Gradual wealth transfer without loss of control. By issuing growth shares to children or grandchildren at the outset, the FIC allows future value to accrue to the younger generation from day one, without the founders relinquishing their voting rights or access to income.

• Inheritance tax planning. The value that accumulates in the FIC in the hands of younger family members is outside the founding generation’s estate, and careful structuring can reduce or manage the IHT exposure of those shares over time.

• Family governance. A FIC brings generations together as shareholders and directors, creating a shared stake in the management and growth of family wealth from an early stage. Alongside the articles of association and shareholders’ agreement, a family charter can be drawn up to set out the family’s values, investment philosophy, and governance arrangements — providing a framework for decision-making extending beyond the purely legal and financial.

• Flexibility over time. A FIC can evolve as the family’s circumstances change – share classes can be redesigned, new family members can be introduced, and the investment strategy can be adapted — all within the corporate framework. It is also possible to convert an existing family company into a FIC where the family holds other businesses.

Conclusion

A FIC can be a powerful vehicle for managing, growing, and transferring family wealth across generations. Its ability to separate economic value from control, combined with the flexibility of its share structure and its suitability as a governance framework, makes it a compelling alternative to traditional trust-based planning.

However — as the title of this article suggests — a FIC is not a quick ‘fix’ for those seeking to mitigate their tax exposure. Establishing and maintaining one requires careful professional advice at every stage, from the initial structuring and funding, through the ongoing tax compliance obligations, to the eventual exit strategy.

This article is for general information purposes only and does not constitute legal or tax advice. Specific advice should be obtained in relation to your individual circumstances.

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