HMRC is increasing its compliance checks on family investment companies, with a particular focus on where personal wealth overlaps with the trusts and company structures that sit around it.

The move comes as HMRC’s latest estimates put the overall tax gap, being the difference between the tax theoretically due and the amount actually collected, at £59.2 billion for 2024-25.

The gap attributed to wealthy individuals has risen from around £1.6 billion before the pandemic to £3.6 billion and for the first time it is now larger than the gap for all other individual taxpayers combined.

To help close this gap, HMRC is investing heavily in its Wealthy and Mid-sized Business Compliance (WMBC) directorate.

Many of the approaches it uses with large businesses are now being applied to family-owned groups, looking not only at corporate tax positions but also at how the wider family holds and draws on its wealth. HMRC is backing this with greater use of data, including AI-driven risk assessment.

In practice, this means that rather than looking at a company and its owners in isolation, HMRC is examining family-owned groups as a whole and attempting to untangle the “blurred lines” between business activity and the individuals behind it.

For example, questions are being asked about how money and assets flow between the company and family members.

This could include whether directors’ loan accounts and shareholder loans are being used to fund personal costs such as school fees or travel, which can trigger additional tax charges for both the company and the individual if not handled correctly.

There is also scrutiny of family members on the payroll. HMRC will want to see a commercial justification for each role, with pay that reflects a genuine contribution to the business.

As James Hardy, Forensic Director at Milsted Langdon, explains, this added scrutiny means family investment company owners need to be ready for an HMRC enquiry and taking expert advice early is the best way to prepare.

“HMRC now has far more data at its disposal than it did even a few years ago and it is using it to view a family investment company and the people behind it as one picture,” he said.

“When money moves between a company and its owners, whether through a director’s loan account or a salary paid to a relative, HMRC will expect a clear commercial rationale and records that back it up. Where those records are missing or inconsistent, enquiries tend to widen quickly.

“The family investment companies that come through an enquiry well are usually those that review their arrangements before HMRC asks questions. Forensic accountants can assist by tracing funds between family members and entities, reconstructing director’s loan accounts, investigating related-party transactions, assessing the commerciality of remuneration arrangements, and quantifying any resulting tax exposures.

“Taking a fresh look at loan accounts and remuneration now is often far less costly than having to reconstruct the history in response to a formal information notice later.

“Where HMRC challenges a taxpayer’s position, forensic accountants can analyse the underlying financial evidence, quantify disputed amounts, and provide expert evidence in any subsequent litigation or Tribunal proceedings.”