Estate planning

Inheritance tax was famously described as a “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.

A common misconception is that Inheritance Tax (IHT) is a “tax on death”; it is not. It is in fact a tax on the transfer of value and can apply to certain lifetime transactions where an individual’s estate is reduced – such as on the transfer of assets to a trust.

However, most individuals leave significant estate planning to be dealt with in their will and thereby unwittingly increase their exposure. In the absence of a will, an estate will pass under the rules of intestacy, with potentially disastrous consequences. Furthermore, wills may be subject to a deed of variation by the beneficiaries who wish to change the manner in which the estate passes.

With considered forward planning every taxpayer has the ability to manage the controlled giving of their assets and their exposure to IHT during their lifetime.

The estate planning problem is compounded where succession is desired for a family business:

  • The donor may consider that the assets will qualify for business property relief and be outside the scope of IHT. However, qualifying for that relief may be affected where a company holds investment property, stocks or large sums of cash. Assets used in a business but owned by the proprietor may potentially only qualify for 50% business property relief – in the case of land and buildings this could lead to a large exposure.
  • The donor may not wish to lose control or involvement in the business and doesn’t know how to maintain sufficient involvement.
  • Innocent actions such as issuing new shares or transferring shares or assets used by the business to one’s successors can potentially give rise to immediate income tax charges if not handled in the proper order or mitigated by claiming available reliefs.
  • Many will consider a trust or similar structure appropriate to maintain some control although this can be fraught with problems. It may be that a similar result can be achieved much more simply by considering shares, classes of shares, rights attaching to those shares and shareholder’s agreements.

It is important that individuals recognise that estate planning is an ongoing and evolving process; as an individual’s business and circumstances change over time, so too will the available or advisable planning opportunities.

External factors, such as changes to the political and legislative landscape also give rise to the need to review actions that an individual has already taken in respect of managing their estate in order to ensure their continuing effectiveness.