Estate planning: Giving and protecting family assets
Adam Mallett, Illustrator
Asset protection, succession and estate planning often require the use of a suitable entity for holding and managing family wealth.
Many people use their will to distribute wealth to loved ones on death but forget that there are a number of strategies to gift assets during your lifetime, which Nick Rucker of Irwin Mitchell summarises.
Through careful structuring, family assets can be safeguarded for future generations and protected from creditors and matrimonial claims. Such planning enables a controlled transfer of wealth reducing the risk of disagreements arising on death.
Each strategy has its own particular benefits, issues and tax considerations. Some of the common approaches are brie y considered below together with available exemptions and reliefs that apply when lifetime planning. Deciding how to approach succession planning can be a daunting and difficult task. A lot depends on your objectives, your personal circumstances, tax legislation and the wider tax environment.
MAKE OUTRIGHT GIFTS
If you gift cash or assets to your children/ wider family members and survive seven years, then the gifted assets will be outside your estate for inheritance tax (“IHT”) purposes on death. You must be careful that you do not continue to use or benefit from the gifted assets as this would be a “gift with reservation of benefit” and will not reduce your taxable estate.
USE YOUR IHT ALLOWANCE AND OTHER EXEMPTIONS/RELIEFS
Everyone has a tax-free allowance to make cash gifts of up to £3,000 per year. Any amount in excess may trigger an IHT charge on death. The rate of tax currently payable tapers over a seven-year period after giving, so if you survive seven years of making the gift, the cash transferred is free of IHT.
Gifts between spouses/civil partners and gifts to certain universities or charities are exempt from IHT. Business or agricultural assets (provided certain requirements are met) can also be exempt but partial claw back can occur if some of the property meets the conditions and some does not.
MAKE GIFTS OUT OF INCOME
If you have surplus income and you can afford to make regular gifts of this income, either outright to your chosen beneficiary or into a trust, then you can rely on the “regular gifts out of income” exemption. This is effective (especially with saving for minors) when surplus income is paid into a trust and can accumulate over time.
ESTABLISH A TRUST
A trust is a flexible tool if you want to give assets away to your children/grandchildren now, but want to postpone the time at which they get access to the funds.
There is normally an immediate 20% IHT charge on transferring assets worth more than the IHT threshold (currently £325,000) to a trust, so most individuals are limited to trust gifts of a maximum of £325,000 in any seven years. For married couples, the effective limit is £650,000. Trusts work particularly well when assets qualify for business or agricultural property relief and particularly effective planning can be undertaken before the sale of a family business if timely advice is taken.
Although capital gains tax (“CGT”) may have to be paid on a gift of an asset (at market value), CGT can usually be deferred when gifting to a trust.
USE A FAMILY INVESTMENT COMPANY (“FIC”)
FICs have become popular as a bespoke, collective holding vehicle for family assets. A FIC is typically a private limited company that is used for controlled wealth transfer planning. Irwin Mitchell has been advising on these structures over the last decade further to the decline in the use of trusts in estate planning. FICs also provide robust protection in the context of divorce. The articles of association and shareholders’ agreement can be drafted to provide that children enter into a pre-nuptial agreement before marrying. Mechanisms to recall the shares if they do not do so can be included.
The company structure enables tax efficient accumulation of wealth and provides an opportunity for gradual control to be handed over to the next generation. Shareholders in a FIC only pay tax to the extent that the FIC distributes income to them. If dividends are not issued, the profits will remain in the FIC and can be reinvested to produce greater profits. With decreasing corporation tax rates, we envisage that FICs will remain an important tool in estate planning armoury.
USE A FAMILY LIMITED PARTNERSHIP (“FLP”)
FLPs are an alternative vehicle for controlled succession planning and are typically used in estates of considerable size to manage and transfer multi-generational wealth. FLPs are likely to be classified as a collective investment scheme. Cost implications and operator functions may need to be delegated to the FCA regulated operators.
Nick Rucker is Head of Tax, Trusts & Estates London & International at Irwin Mitchell
Irwin Mitchell LLP
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The above must not be taken as advice and is generic. Advice should be tailored to an individual situation and it would be strongly recommended that such advice is sought on any of the above.