Succession planning and your wealth: A secure future for generations

Succession planning considers the whole of a family’s wealth and their goals for the future.

Typically, when I sit down with clients for this, they will be parents and grandparents wanting to make plans to ensure a secure future for themselves and also their children/grandchildren. I will be looking at:

• What wealth have they got and where is it held?
• What are their lifetime wishes for the wealth and after they die?
• What about philanthropy?
• Have they got an up-to-date Will and power of attorney?

Clients often have ongoing concerns about the level of Inheritance Tax (IHT) and over the last 20 years clients have seen capital values, especially property, increase significantly so their exposure to either Capital Gains Tax (CGT) on sale of property or IHT on death is high. When people must sell beloved family assets to pay the IHT bill that can be stressful and divisive in a family where one person wants to keep the asset — perhaps a childhood home and the other wants to sell. Families want to avoid these sorts of squabbles and leave everything in order.

Clients can consider making gifts to family members if they can afford to do so. Before giving anything away a person should first assess what they need for their own needs and therefore what can they afford to give away. Lifetime giving is simple and if the donor (the person making the gift) survives a full seven years from the date he made the gift then the gift falls out of the donor’s estate for IHT purposes. Gifting is simple and effective and has stood the test of time with HMRC. However, a gift puts the funds or asset given away directly in the hands of the recipient and the donor has lost all control over the sum given away. There can be tension’ between the desire to reduce the IHT burden and protection of wealth. In a relationship breakdown the wealth could be vulnerable and there could also be concerns over the stewardship of money. In such cases the donor could consider creating a trust to provide some asset protection.

Typically, grandparents with sufficient surplus liquidity can consider settling funds into a trust for the benefit of the minor grandchildren. This provides a vehicle with some funds ringfenced for them and it can be a very tax efficient over the long term. The donor can settle The IHT nil rate band allowance of £325,000 on to trust without incurring a tax charge. This is a gift to the trustees and can potentially be repeated every seven years, provided no other transfers have taken place in the meantime. The interaction of making a gift to a trust and making simple PETs always needs to be considered.

The appointed trustees have overall responsibility of trust funds and can appoint investment managers to grow the fund. If started early enough this sort of planning can help reduce the value of the balance sheet of a wealthy individual and the trust can grow over time, outside of the donor’s estate, and is often used for paying school or university fees.

In situations where there are blended families with children from more than one marriage, a trust can also be very helpful to ensure wealth ends up in the hands of the intended beneficiary.

If there is a family trading business, succession needs to be carefully planned. Not all children may want to go into the business, but if they do, planning for their involvement takes time. The ability to effectively manage the business is crucial, but you mustn’t forget dealing with family dynamics and effective tax planning, to make the transition as smooth as possible.

Family investment companies increasingly offer a range of potential tax benefits in the right circumstances. A FIC is generally a corporate vehicle that holds a basket of investments. The shares in the FIC are held by family members and different classes of shares can be held for different members so creating a structure where economic interest and control is held according to the family’s overall wish and objectives. The structure can be very flexible and adapts to individual circumstances and so a FIC is a very bespoke solution.

The key tax benefits are Investment income and gains are taxed at the corporate tax rate and future growth in value of investments can pass to the next generation.

Over time family members may move to other jurisdictions and their personal tax position will be impacted by the local taxes they pay in their home jurisdiction. Advice must always be sought in the other jurisdiction as the tax treatment may not follow the UK.

With any structure comes a layer of complexity and some clients don’t want complexity, so they are not for everyone even if it provides greater tax benefits. There is no single answer but a range of possibilities. Emotional family issues may be leading factors and the tax consequences follow. Ultimately, good and effective succession planning hinges on understanding the client and what is important to them so they can be certain their wishes are met.