Family, Wealth & Estate Planning

Good and timely advice can save money and distress.

Family Wealth & Estate Planning

It is natural for families to want to protect the wealth they have generated over their lifetime as it passes from one generation to the next. Passing wealth during an individual’s lifetime can trigger significant tax costs, but the tax suffered by an estate on death can also be significant. These tax costs, and other threats, can be mitigated with careful planning.

There is a wide range of planning opportunities available, and suitability of a particular approach will depend on the specific circumstances and preferences of the client.

The majority of the tax planning we advise on centres on Business Relief (‘BR’), which provides (usually) a 100% deduction in the value of the qualifying asset with an individual’s estate. BR is generally only available for interests in trading businesses or shares in companies carrying on trading businesses, but non-investment business with few exceptions can qualify.

Where a client can access BR, planning could be available to double the value of the relief. Similarly, a qualifying company can be used to shelter the value of investment assets from IHT, or a client can invest in BR qualifying investments several providers offering such investments. We have significant experience reviewing a company’s, or group’s, qualification for BR and can advise on the establishment of qualifying companies such as establishing a lending business).

However, not all planning centres on BR, with an array of options available to manage an individual’s estate and to pass wealth efficiently.

An example of planning we have implemented

Scenario

A couple owned a company that owned and let residential property. The value of this company’s assets was in excess of c£6m representing a current exposure to Inheritance Tax (IHT) in their estate of c£2.4m.

The couple have no intentions to sell this company and/or any of its assets. They want to pass the company on to their children and would prefer to do this during their lifetime so the children can also receive some income.

If the couple gifted some of their share to their children a Capital Gains Tax (CGT) charge would arise. Furthermore, the value of any shares remaining in their estate at death would be within scope of an IHT charge of up to 40%. As the value of the company is likely to continue to grow their estate would continue to be exposed to an increasing IHT cost.

The tax planning opportunity

The couple could ‘sell’ the company to a new company set up by their children solely in return for loan notes.

We refer to this transaction as a ‘Family Buy Out’.

The result

The children are brought into the business without giving rise to a CGT charge. In this instance this prevented a CGT charge on a gain of c£5.9m.

The value within the couple’s estates is frozen at the value of the loan notes. As these loan notes are redeemed, and provided the resulting cash is paid out of the estate, the value of their estate will reduce over time, producing an IHT saving of up to £2.4m.

The couple can effectively utilise the loan notes to extract value from the company at CGT rates. By living off the proceeds, their estate reduces at the same time.

They can also take advantage of personal Income Tax allowances and savings rates to receive interest at no tax cost.

In this instance we calculated they could collectively extract up to c£120k per annum at an effective tax rate of 5%(*). This would need to be annually monitored and is subject to changes in tax rates and policy.

The children are shareholders and therefore can receive dividends to supplement their existing income should they wish.

(*) Based on applicable tax rates and policy in the 2020/21 tax year

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