What is the key to successful succession planning?

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Post pandemic life has left many of us thinking more about our financial wellbeing, ensuring our assets are in good order during our lifetime but also our legacy.  The key to effective inheritance and succession planning is generally to use a combination of lifetime gifting with the tax efficient transfer of assets on death. A big factor in the decision making process is how one feels about control; do you wish to retain control in relation to assets gifted during your lifetime or maintain control after you have gone, or are you happy to make direct gifts and relinquish control to the next generation?

Losing control?

Where family wealth is built up over many years of hard work and dedication, there will be parents who do not wish to simply give away assets in lifetime and immediately lose control of these.  They may hold importance in the need for the next generation to learn the value of money.  With direct gifts, there is a risk that wealth may be squandered away, or vulnerable to settlement on divorce, resulting in the loss of assets outside the family.  Whilst direct gifting is generally the simpler option the simplicity may be outweighed by the discomfort of losing control. This is why many individuals look to the creation of trusts or family investment companies (FICs) which seek to enable them to pass on wealth but most importantly, retain control over the assets either as trustees or as directors in the company.

What is right for your own family’s circumstances will depend on your specific circumstances, what assets you have, your requirement to retain access to your capital, and whether you wish to retain control over assets gifted.  Bespoke advice should always be sought.  Below we consider some of the simple reliefs available for direct gifting.

Lifetime gifting – keeping things simple when succession planning

Lifetime gifting is a topic which is often on the agenda. The desire, of course, in many cases is for parents and grandparents to assist children and grandchildren with, say, getting onto the property ladder or paying school fees.  Not all succession planning needs to involve complex structures including trusts or family FICs, although both vehicles may be particularly tax efficient in certain circumstances.  Our article looks at the tax considerations to consider if using a family trust or FIC.  The benefit of not having complex tax considerations/administration which arise on transfers into trusts or FICs may result in a preference for making direct gifts. Click below to find out more about gifting.

What about making outright gifts above the £3,000 annual allowance?

An individual can make gifts of cash or chargeable assets to any individual as they see fit.  The gift of cash or assets (above the annual allowance) is considered to be a potentially exempt transfer (PET) and is exempt from IHT providing the donor survives 7 years of making the gift.  Even where the gift becomes chargeable, the value of the transfer is frozen at the time of the original gift.

There are additional tax implications to consider. A direct gift of chargeable assets (e.g. a property) to an individual may give rise to Capital Gains Tax (CGT) consequences based on the market value at the date of the gift. In this instance, a dry CGT charge may arise as there is no consideration received. In certain circumstances the gain arising may be deferred on the making of an election, where the gift is a “qualifying” asset. With gifts of cash there is no CGT.

An individual can also make gifts to non-individual persons which can include trusts or FICs. In this case, the gift would be immediately subject to IHT, subject to any available nil rate band or exemptions (e.g. Business Relief in relation to qualifying company shares gifted). IHT at 20% will apply to the transfer over and above the nil rate band where no relief is available. In addition there may also be CGT implications on making the transfer. In relation to gifts made into trust, the gain arising may be held over on the making of an election and this relief is generally not available on the creation of a FIC. Bespoke advice should be taken.

Care should be taken throughout that a gift is a complete gift.  The gift of an asset with “strings attached” will negate the IHT benefits sought.  Again, specific advice should be taken where assets are gifted but there is the risk that the donor will continue to benefit in some way.

Can I make use of the £3,000 annual allowances for gifts?

Each year an individual can make a gift of £3,000 to any individual with no IHT consequences, therefore a husband and wife can make gifts up to £6,000 each year.  If no gifts were made in the previous tax year, then the allowance may carry forward to the next year before it is lost.

A marriage allowance is also available to both parents on the occasion of their child’s wedding of £5,000 (£2,500 for gifts to grandchildren) which is a valuable relief to utilise.

Making regular gifts out on income

This is a really useful relief available to anyone wishing to make regular gifts to an individual.  For example a grandparent may make regular gifts to grandchildren to pay for private school or university fees.  Regular gifts, e.g. gifts made each quarter may not result in any Inheritance Tax (IHT) implications for the donor.  Careful recording of these gifts is important to ensure that gifts made out of income are exempt from IHT after the doner dies. It would be the job for the Executors following death to demonstrate and prove to HMRC that the gifts made are eligible for relief and therefore it is vital to keep accurate records of annual income, details of the gifts and to be able to demonstrate that the donor’s lifestyle was funded without needing to call on their savings.

As a result of the gift, the individual must not need to fall back on their capital to fund their lifestyle (e.g. use savings to buy a new car/pay for their holidays).  The current rise in the cost of living should be considered where excess income is gifted away and care should be taken.

The importance of an efficient Will

As mentioned above, successful succession planning will include a combination of effective lifetime gifting but it also requires consideration for the effective transfer of your Estate after you have passed. 

Post pandemic, more of us are realising the importance of having up to date Wills and avoiding the worst case scenario of dying intestate.  Whilst it is important to have a Will, it is as also important to ensure your Will is reviewed regularly to ensure it is up to date and still relevant.  With constant changes to tax legislation, changes to family circumstances (e.g. marriage, divorce) all these factors can impact (or possibly invalidate) your Will. Now is the time to be seeking proper advice and to give due consideration as to how succession planning will work for you and your family.

What happens to the family home?

For many the family home will be the prime Estate asset.  On second death, the family home will be left to beneficiaries in accordance with your Will.  Dependent upon the value of your Estate and who the property is left to, will determine whether the Estate benefits from an additional allowance – the residential nil rate band.   This can be worth up to £250,000 where an Estate does not exceed £2million and therefore advice should be taken in lifetime and on death to ensure that this valuable allowance is not lost.  For Estates worth in excess of £2m you could consider whether it is worth looking at reducing the size of your Estate, by making lifetime gifts to bring the value of your Estate down to £2m.

If you wish to discuss succession planning further, get in touch with us below:

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