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I thought it might be interesting if I looked back at my 2023 caseload and highlight some stories. What follows are all real live cases. Estate planning must work for the client and their heirs. One of my definitions of real love is to leave your affairs in a tidy manner. What follows are I think examples of this. If you have any questions, please contact me.

Robert Schon

T(DD:) 020 7267 5010.

E: rschon@streathers.co.uk

1) Maximising the number of family members who can enjoy business asset disposal relief (‘BADR’).

My clients were in their 60s, own a trading company, have adult children and are beginning to think of selling or liquidating their company.

BADR, previously called Entrepreneurs Relief, is a CGT relief to incentivise individuals to grow and invest in their trading business. BADR is available when qualifying business assets (like shares in a trading company) are disposed of. The rate of CGT due on qualifying BADR gains is 10% and is subject to a £1mlifetime limit. The current maximum BADR tax saving is £100,000.

To access BADR when shares in a trading company are sold, the following conditions must be met for at least 2 years before the date of disposal:

• The taxpayer must be an employee or director. There are no minimum hours requirements so s/he can work part time; and
• The shareholder must own at least 5% of the shares giving at least 5% of the voting rights; assets on a liquidation; dividends and sales proceeds.

S165 Taxation of Chargeable Gains Act 1992 allows e.g., a gift of shares in a family trading company to occur on a no gain no loss basis. This means, for example, for the transferor their child can receive 5% of the family company share capital without triggering a CGT charge. There is a similar Inheritance Tax relief.

The net result is if more than 2 years before any planned sale (or liquidation) of a family trading company, each adult child of the family is e.g., appointed to the board and owns at least 5% of the shares for 24 months pre the disposing event, when the family trading company is sold or liquidated a CGT saving will be enjoyed by the family.

2) A single ageing parent (‘P’) who has more than 1 child and adds only 1of their children as a signatory on their bank account otherwise than pursuant to a power of attorney.

The issue here is that absent evidence of a contrary intention, when P dies the balance in the joint account will pass by survivorship to the surviving account holder and will not pass as an asset of P’s will which says ‘equally to my children.’

If this result is not what P wants/intends, documentation should be put in place by P (and is best put in place before the joint account is opened) to ensure the account passes according to the terms of P’s will.

I thought it might be interesting if I looked back at my 2023 caseload and highlight some stories. What follows are all real live cases. Estate planning must work for the client and their heirs. One of my definitions of real love is to leave your affairs in a tidy manner. What follows are I think examples of this. If you have any questions, please contact me.

Robert Schon

T(DD:) 020 7267 5010.

E: rschon@streathers.co.uk

1) Writing a will for X; a sole director shareholder of a trading company

My concern was that if X died whilst still the sole director shareholder that the continuity of the business would be at risk with negative consequences for its staff, customers and the value of X’s estate.

If the company

• Was incorporated on or after 28th April 2013; and
• Had adopted the Companies Acts model articles including article 17(2); and
• X (as sole shareholder) dies with a valid will

Article 17(2) allows X’s personal representatives to appoint a new director. NB it only allows the appointment of 1 director and only if the company has no shareholders alive.

In this case, the company was incorporated prior to 28th April 2013 and its articles had not yet been updated to include an equivalent provision to model articles 17(2). Fortunately, steps could be taken to amend the articles and ‘cover off’ the risk.

It vital that business owners and shareholders of private companies have a valid will and lasting power of attorney property and financial affairs in place and that in drafting these, consideration is given to understand what will happen to the business when X dies/ceases to have capacity.

2) Writing a will for Y whose assets include an Isle of Man (‘IoM’) offshore bond

I pointed out that Y had an estate outside the UK and we should enquire if for example

• Probate would be required in the IoM on Y’s death; and
• If it would make things easier if on Y’s death they had an IoM will?

Our enquiries resulted in Y being told that if Y, in their lifetime, transferred the IoM policy to a bare trust for Y’s benefit, on Y’s death the issuing IoM company would need only a copy of Y’s death certificate and a completed claim form for the proceeds of the policy to be paid to Y’s remaining bare trustees and so potentially be available to Y’s executors to help fund any Inheritance Tax (‘IHT’) due. Probate would not be required.

A bare trust has been put in place using the IoM company’s pro forma deed.

Robert Schon looks at government nudges on inheritance.

It has been suggested that an article on tax planning for families might be an interesting adjunct to my earlier item on wills. Not everyone agrees with the concept of tax planning, but it seems at least fair to share the sort of information that those who retain tax lawyers might receive, and in a sense, all you have to do is follow the government signposts.

What amazes me about our tax code is how often it is well thought out. Governments know what they want to encourage and support, and what they don’t. They achieve their goals by putting up signs saying in effect, ‘this way please’.

They encourage saving in ISAs and pensions by making income and gains in these ‘wrappers’ tax free. And when it comes to passing on wealth, they make that tax free for those who are married or in a civil partnership. 

My job is to help clients understand tax options like the ones above, which you can call the blessed routes, and avoid the non-blessed routes, metaphorically equivalent to parking on double yellow lines, or even red routes.

When it comes to passing on money to the next generation, this is easiest with at least one parent still alive and discussing with them how you/your family want to receive whatever you might inherit. The parent’s will can be structured to reflect the wishes of each of their children and the example below illustrates how that can benefit more than one generation.

Let us assume Sarah has one surviving parent, Helen, and two underage children. Sarah has asked for the part of the estate she is to inherit from Helen (say a rental property) to be left in a discretionary will trust where the beneficiaries will include herself, her siblings and their issue (children, grandchildren etc) with Sarah and her partner named the initial trustees.

After Helen dies, in terms of inheritance tax (IHT) and capital gains tax (CGT) this structure is treated in tax terms as if the property had been left outright to Sarah in Helen’s will. The Government receives exactly the same amount of tax.

The rental property passes to the named trustees who, going forward, grant the tenancies and receive the rent.

At this point the discretionary will trust creates a separate taxable entity which owns an income generating asset that Sarah, her children and heirs can benefit from without the asset or income belonging to her or any beneficiary, including when a beneficiary dies. This means that on say Sarah’s death, her taxable estate will not include the value of the trust fund.

This is because the trust is a separate legal person, with its own income tax; CGT and IHT regime. For income tax the default position is that the trust incurs tax at 45% on its taxable income to 5^th April annually. For IHT it incurs an IHT charge every 10 years at a maximum IHT rate of 6% on the then trust fund value above £325,000, and it incurs a reduced IHT charge if capital assets are ‘advanced’ out of the trust to a beneficiary between 10-year anniversaries. The trustees need to ‘save’ from the post-tax rents received to fund these IHT outlays.

The reasons Sarah wanted Helen to leave the inheritance via the trust include:

• Sarah as a ‘beneficiary’ is able to benefit from the trust during her lifetime should she wish;
• The trust has a wholly independent IHT profile from Sarah, so her death has no impact on the trust IHT position;
• The trust enjoys its own £325,000 IHT nil rate band;
• During the period Sarah doesn’t want/need to access to trust income it can be paid to her school age/university age children who have no other income to 5^th April. This allows Sarah on behalf of her receiving child/children to claim a tax rebate from HMRC of the 45% income tax withheld at source up to each receiving child’s income tax personal allowance with any excess being taxed at 20% to that limit;
• Should Sarah, on behalf of her receiving minor child, choose; trust income can be used to help finance school fees or if a child is at university, their education or living costs, in effect income tax free up to the recipient’s income tax personal allowance which is currently £12,570.

Throughout my working career our tax law has prevented parents avoiding tax by giving income-generating assets to their children, taking advantage of the child’s personal tax allowance.

Except for a minimum income threshold each tax year, as a general rule, any gift by a parent to a child that generates income is taxed as that of the donor parent at his/her highest income tax rate. This anti-avoidance legislation does not apply e.g., to income paid to a grandchild from a will trust set up and funded exclusively by a grandparent.

A word of caution. Trusts are like a garden. They need care, attention, time and a close eye to income tax and IHT compliance. Somebody has to do it, and if an outside third party is involved, fees are usually charged and the cost needs to be factored in when deciding if a will trust is a good idea.

One other ‘sign-posted’ trust would be for a disabled beneficiary, ‘disabled’ being a defined term. In essence HMRC ‘blesses’ these by saying discretionary benefits received by the disabled person are left out of account when determining the state benefits s/he is eligible to receive. What is more, such qualifying trusts are not affected by the IHT 10 year and periodic charges referred to above and can be set up without triggering an IHT charge so long as the person creating the trust survives the creation by seven years. Such trusts can be set up in lifetime or on death. I am very happy to provide further information on this if there is interest.

Tax is the one place where accountants and lawyers overlap.  As a general rule accountants are excellent at tax compliance, but the best place to get tax right is in the initial legal structure. 

What I see is that most clients, whether corporates or individuals, have no appetite for aggressive tax planning. They want blessed routes with no comeback. It is my job to help point my clients in the right direction. If I can be of help, please get in touch.

Robert Schon was a tax partner for 17 years in a City-based international law firm and has worked as a sole practitioner for 18 years in Swains Lane, since 2021 with Streathers Solicitor. He can be contacted at 020 7267 5010, rschon@streathers.co.uk.

Robert Schon runs through what you need to consider

Wills are the last communication of love we leave, and as such they require thought, engagement and a serious attempt to do no harm. The process can also be described as a ‘stupid what if game’, because we have no idea of the circumstances of our death, so a well crafted will covers various scenarios.

Typically for a couple who are married or in a civil partnership their will at its simplest says:

• If I am the first to die – all goes to my spouse.
• If I am the second to die – all goes to my children equally who survive me.
• If any of my children have pre-deceased me leaving children – their share is to go equally to their surviving children.
• If none of the above survive to inherit – my estate is to pass to a UK charity.

But

1. if you are UK domiciled and your surviving spouse is not, there are inheritance tax complexities;
2. the above formulation assumes
   • your children inherit outright their share – even if minors; and
   • your surviving spouse inherits outright your assets and if s/he remarries/finds a new life partner; there is no guarantee your assets will pass in due course to your children/heirs.

When I started working locally and helping clients with their wills it dawned on me that there could be a problem with underage children inheriting as the income and capital from their inheritance can only be legally used for their education, maintenance and benefit. The money can’t be used, for example, to carry out a loft conversion at the home owned by their appointed guardians who now need a bigger home to accommodate the additions to their household. Nor can the funds be used to compensate a guardian who interrupts their career to help give stability to young, orphaned children.

My advice therefore is that parents take steps to reduce the risk that their children are, subconsciously or consciously, resented by the nominated guardians for any reason. I do not suggest that parents pay guardians for acting but that parents take steps so that if called upon, their appointed guardians know they have been thought of. I think this can be achieved by either:

• any death in service policy you or your spouse enjoys at work. The letter of wishes to your death in service trustees can say e.g., ‘if my spouse and I both die and we leave minor children please pay x% of my death in service benefit to the person(s) I have named in my will as guardians of my minor children; and/or
• you and your spouse buy joint life second death life cover in case you both die under (say) age 55 and write that policy in trust so the potential recipients include your appointed guardians.

Nothing is perfect but should the what if game mean guardians do become a reality, their knowing that you have thought through how their life may be impacted and taken steps to fund that disruption can do no harm.

Other issues when writing wills for families with minor children include:

1. Who should be legally responsible for holding and managing your children’s inheritance pending their becoming 18 or older? For a number of reasons I am nervous of only appointing your nominated guardians to this role. My concerns include that to your children we hope the appointed guardians become stand-in parents. This may make it difficult for your children when they attain 18 (or older) to ask their guardians for a proper  accounting of how they have applied their inheritance. That said, I think the guardians should  have a seat at the table for their own dignity as it will be they who require access to funds held for your children to help your guardians meet the costs of ‘educating; maintaining and benefitting’ your children. Who to appoint as trustees of your children’s inheritance needs consideration.
2. Who to appoint as the executors to your will? Their job is to:

• gather in your estate (everything you own);
• pay your debts (including any taxes due); and only then
• distribute your estate to your nominated heirs.

Where there is no surviving spouse to inherit, in a best case situation Inheritance Tax is likely to be due on an estate which exceeds £1m.

If you are a business owner (incorporated or not) one of your assets is your shareholding/partnership interest/sole proprietorship. If that business is regulated e.g. a dentist or solicitor, special thought is needed as to whether your professional regulator imposes conditions as to who can be appointed as your executor to control that asset. For example, must it be another e.g. dentist or solicitor? And can a non-dentist/solicitor can inherit that asset.

If you are a controlling shareholder in a company what do the articles of association say as to how your shares can be voted after your death and during the administration of your estate? It may be sensible to change the articles to say that the executors nominated in your will can vote your shares without having to wait for receipt of probate. It may also be that a new director (e.g. one of your executors) needs to be appointed promptly to help give stability to your staff and customers and so help preserve value for your family/heirs.

Also consider if a surviving spouse is the right person to take on this role or whether it should be another, meaning at least two executors should be appointed. It may be s/he is engaged in trying to give stability to your children and his/her new reality as a surviving spouse and may not have the ‘band-width’ to also ‘settle’ staff and customers.

3. How you and your spouse own your home/real estate assets and bank accounts should be reviewed. If you own them as joint tenants they will pass outside of your will automatically to your co-owner. Although this is likely only to be relevant on death 1, if you do not want your surviving spouse to inherit outright and thus have freedom of testamentary disposition in respect of your assets, any joint tenancies should be broken; and

4. If you own assets outside the UK, these should be identified and perhaps local law advice received.

Only we can act to leave our affairs tidily and a will is part of that process. To do the job well one has look at assets; liabilities; ‘responsibilities’ and the qualities (and frailties) of our loved ones and then do our reasonable best.

Robert Schon was a tax partner for 17 years in a City-based international law firm and has worked as a sole practitioner for 18 years in Swains Lane with Streathers Solicitor. He can be contacted at 020 7267 5010, rschon@streathers.co.uk.