Passing wealth to the next generation can appear complicated. Families may need to consider inheritance tax, property ownership, lifetime gifts, business succession and the needs of children or partners from different relationships.
However, effective estate planning does not always require a complicated arrangement. In the Legal Compass podcast, private client specialist Dominic Mackenzie explains why the starting point should be an accurate assessment of the estate, followed by clear advice that the client understands.
In a recent episode of The Legal Compass, Mike Massen speaks with Dominic Mackenzie, private client specialist and Director of Wills & Probate, about the key estate-planning considerations for families, including inheritance tax, lifetime gifts, wills, trusts, property and lasting powers of attorney. You can listen to the podcast here.
Do you have an inheritance tax exposure?
A person should not begin giving assets away or creating trusts until they understand their actual position.
The value of the estate, marital or civil partnership status, family circumstances and the nature of the assets may all affect the inheritance tax calculation. Available allowances can also depend on whether qualifying assets pass to particular beneficiaries.
An initial professional review can help determine:
- The approximate value of the estate.
- Which assets may fall within it.
- What exemptions or allowances may be available.
- Whether inheritance tax is likely to be payable.
- Whether any planning action is proportionate.
This assessment can prevent families taking costly steps to address a tax exposure that may not exist.
Why marriage and civil partnership can matter
Long-term cohabitation does not generally give a surviving partner the same automatic inheritance and tax treatment as marriage or civil partnership.
The podcast discusses the difficult situations that can arise when an unmarried partner dies without an appropriate will. The survivor may not inherit automatically and could need to pursue a claim against the estate. Transfers between unmarried partners may also lack the inheritance tax treatment potentially available between spouses or civil partners.
Couples should therefore understand their legal status and ensure that their wills, property ownership and financial arrangements reflect their intentions.
Lifetime gifts and the seven-year rule
Lifetime gifting can form part of an inheritance tax strategy, but the rules are frequently misunderstood.
The annual gift exemption is not a limit on how much a person is legally permitted to give away. Depending on the nature of the gift and the donor’s circumstances, a larger gift may carry inheritance tax implications if the donor dies within a relevant period after making it.
Before making a substantial gift, consider:
- Whether the money may be needed later.
- The potential inheritance tax treatment.
- Whether the recipient’s circumstances create additional risk.
- How the gift should be documented.
- Whether any ongoing benefit is being retained by the donor.
Gifting should not leave the donor unable to meet their own future living or care costs.
Should parents give their home to their children?
Transferring the family home to children is often suggested as a way to reduce inheritance tax or protect the property from future care costs. In practice, it may create a series of additional problems.
If the parents continue to live in the property, inheritance tax rules concerning a retained benefit may mean that the intended tax saving is not achieved. Ownership by the children may also expose the property to events in their lives, including divorce, bankruptcy, death or a breakdown in family relationships.
There may also be capital gains tax and stamp duty consequences for the children. Similar issues can arise when transferring a rental property, including a possible capital gains tax liability at the point of transfer.
Specialist advice should therefore be obtained before changing the ownership of any property.
Wills for blended families
Modern family arrangements can make succession planning more difficult. A couple may each have children from a previous relationship while also owning a home together.
Leaving everything outright to the surviving spouse may provide security, but it can mean that the first partner’s children have no certainty that they will ultimately receive an inheritance.
The podcast discusses the possible use of tenants-in-common ownership and a life-interest trust in a will. Subject to the couple’s circumstances, this type of arrangement may allow the survivor to remain in the property while preserving the deceased partner’s share for their chosen beneficiaries.
No single structure is suitable for every family, so the will and property ownership should be reviewed together.
When can a trust be useful?
The episode cautions against creating a trust simply because it appears sophisticated or promises an easy tax solution. A trust should have a clear purpose, and the person creating it should understand its costs, administration and practical consequences.
There are nevertheless circumstances in which a trust may be appropriate. These could include providing for a beneficiary who requires additional support or protecting funds where an outright inheritance would not be suitable. A letter of wishes may then help explain the purpose of a discretionary trust and guide its trustees.
Choosing the right trustees is equally important. Trustees may have considerable discretion, so their ability, judgement and relationships with the beneficiaries must be considered carefully.
Business succession and estate planning
Business owners need coordinated advice. A proposed sale, transfer or restructuring may have consequences for the owner’s personal estate and inheritance tax position.
The podcast explains that converting a trading business into cash through a sale may alter the nature and potential tax treatment of the asset. Commercial objectives should therefore be considered alongside succession, tax and estate-planning objectives before the transaction is completed.
The appropriate team may include:
- A private client solicitor.
- A corporate or commercial solicitor.
- An accountant or tax adviser.
- A regulated financial adviser.
This joined-up approach can reduce the risk of one transaction inadvertently undermining another part of the plan.
Why lasting powers of attorney belong in an estate plan
A comprehensive estate plan should cover incapacity as well as death.
A property and financial affairs lasting power of attorney allows selected attorneys to manage financial matters if the donor becomes unable to do so. A health and welfare lasting power of attorney can cover decisions about care and treatment, subject to the authority given in the document.
Without suitable powers of attorney, relatives may face a more complicated process when trying to manage the affairs of someone who has lost capacity.
Keep records of regular gifts
Regular gifts made from income may receive different inheritance tax treatment when the relevant conditions are met. Clear, contemporaneous records can help personal representatives demonstrate the pattern of giving and the donor’s financial position.
Records could include:
- The date and amount of each gift.
- The recipient.
- The donor’s income for the period.
- Normal expenditure.
- Evidence that the donor retained sufficient income to maintain their usual standard of living.
Professional advice should be taken on whether a particular pattern of gifts is likely to meet the relevant requirements.
Practical next steps
Anyone who has not reviewed their arrangements for several years should consider:
- Preparing an up-to-date schedule of assets and liabilities.
- Reviewing their will and family circumstances.
- Checking how jointly owned assets will pass.
- Putting lasting powers of attorney in place.
- Recording previous and future lifetime gifts.
- Reviewing business succession arrangements.
- Taking legal, tax and financial advice before transferring valuable assets.
The aim is not complexity for its own sake. It is to create a plan that the individual understands, that provides appropriately for their own future and that gives their family as much clarity as possible.
If your will, business arrangements or inheritance tax position have not been reviewed recently, speak to a private client solicitor before making substantial gifts or changing the ownership of property.
Ison Harrison Solicitors specialise in wills and probate matters, including inheritance tax matters.
Contact our team today by calling 0113 284 5000 or email hello@isonharrison.co.uk.
