Looking back on what has been a really busy few years working with entrepreneurs and family businesses, we have worked a lot on estate planning. It may not be the first question that I get asked or indeed the original scope of our advice but it is definitely a priority for many in the current stable capital taxes environment.
When I first meet with new clients, I usually find they have often sought inheritance tax advice some time ago and feel that they have "got it done" (to borrow a phrase) so don't need to worry about it anymore. It is true that having a plan is better than not having a plan, but it is important to regularly review the plan and make sure that you have a Plan B.
I am lucky that we have a brilliant Private Client Legal as well as Tax team. So when we have conversations about estate planning, we can discuss the broader legal issues too. I am always surprised by how many clients do not have powers of attorney in place or haven't reviewed their will for years or indeed following an event such as birth, death or marriage.
The complexities of owning assets outside the UK, especially real estate, can easily be overcome with great coordinated global tax and legal advice. However, I am amazed at how many individuals with holiday homes overseas have not really factored in the overseas rules on succession and how this interacts with their UK position. There is usually a simple solution.
So, what do I mean by an inheritance tax Plan B? For many of my clients, their Plan A is usually fairly straightforward, such as spouse exemption or relying on business property relief. But what if that fails, either due to changes in your circumstances or changes in the rules? That is where Plan B comes in.
Inheritance tax planning is usually longer term so it is good to consider your vision for the future – I call this the masterplan. In formulating this, we have a discussion about short, medium and long-term intentions which become the component parts of the masterplan. Do they need cash to fund their lifestyle or a particular project? Do they want to pass wealth to their children and grandchildren? Do they want to spend more time in the sunshine outside the UK? These shorter-term plans can generate some ideas as well – it is easy to jump over these and just focus on the long term. But plans change as do the tax rules so it is important that flexibility is a key component of the masterplan too.
For example, one of my clients wanted to start to transition the family business to the next generation. They wanted to take a step back from the day-to-day running of the business to spend some more time in their holiday home in Spain. This was the masterplan.
When we talked about their short, medium and long-term plans, it became clear that they wanted some cash from the business to fund these plans. So we changed the masterplan to create some liquidity in the short and medium term. The long-term discussion then became a conversation about a potential listing or exit. This highlighted a real mix of views about whether this was the best course of action for the family.
We talked about Plan B, what if an exit did happen and what impact would that have on the masterplan? This led to discussions on governance and asset protection and the establishment of a family trust for the creation of a legacy and a source of funding for future generations. Quite a different outcome from the start of our discussions, but the new masterplan is a great framework for the family going forward.
So why do something now? Clients often ask me this, especially when there is no burning need to think about estate planning. My response is usually that doing nothing is sometimes the right answer, but the key is to consciously do nothing.
What do I mean by consciously doing nothing? Dust off your master plan and make sure that it is still fit for purpose – for your family and for the tax rules as they stand. Make sure that you have looked at all the component parts of your master plan – the short, medium and long-term aims – and have considered whether you should have a Plan B.
So back to my question of ‘why now?’ Given the UK's current fairly low capital tax rates and the possibility of a general election in the next few years which could disrupt the status quo, we do potentially have a period of unusual stability for capital taxes. Even when considering the global economic backdrop and the UK's current political uncertainties, the focus appears to be on the taxation of work rather than the taxation of wealth so perhaps it is the right time to consider your plan B.
To further discuss considerations for your estate planning, feel free to contact Jo Bateson.