What is Succession Planning?

Death and taxes – they are described as two of the world’s certainties, yet it is remarkable how few of us in reality plan for such events.

Failing to put in place appropriate arrangements during your lifetime could mean that your loved ones who you would intend to benefit from your estate may fail to do so according to the strict letter of the law; those who do benefit may have been better catered for had you put bespoke structures in place; and your estate does not pass in the most inheritance tax (‘IHT’) efficient manner.

Succession planning is a broad topic – the following should serve to provide you with some ‘food for thought’ in the context of your own arrangements.

Tax planning

Simply put, tax planning is the process of considering and putting in place arrangements to mitigate the IHT due on your estate on your death.  These arrangements are entered into during your lifetime, and can either take place then or upon death via your will.

There are many statutory exemptions, allowances and reliefs available to mitigate IHT (i.e. measures wholly accepted by HM Revenue & Customs), but few families take full advantage of what is on offer.  Many find the notion of discussing death uncomfortable, some simply put it off until it is too late to do anything meaningful (if at all), and others wrongly assume that seeking legal advice can be complicated and costly (when in reality the tax savings often far outweigh the up-front initial costs).

To determine the arrangements most suitable, advisers typically start by ascertaining a client’s (i) personal and family circumstances; (ii) the nature and extent of their estate assets and liabilities; and (iii) their aims and objectives.  Only then can a tailor-made estate planning strategy be formulated, and which could include the following planning options (to name but a few):

• Implementing a gifting strategy for assets up to (or even more than) your tax free amount known as the nil rate band (‘NRB’) allowance (currently £325,000).  Depending on your circumstances, this can utilise a combination of outright gifts, settling assets into discretionary trusts, gifting to bare trusts and (capital-fixed) interest-free loans that are later forgiven in whole/part.  It is worth noting that gifting strategies have been brought to the fore of many parents’ minds recently as a result of the financial pressures experienced (largely) by younger generations during the COVID-19 pandemic (e.g. resulting from job losses, reduced opportunities, higher than ever competition to get onto the housing ladder, etc.)
• Making gifts out of surplus (net) income, which qualify as exempt from IHT provided such gifts follow a settled pattern of gifting and allow the donor to maintain his/her usual standard of living (there are criteria to meet and records to keep).
• For internationally-mobile clients, considering their tax residence and domicile status, and the applicable UK IHT consequences of their future plans, and advising accordingly.
• Considering whether assets can qualify for business property relief or agricultural relief from IHT and the scope to re-arrange prevailing arrangements to maximise those reliefs.  For example, ‘Balfour planning’ for large estates with both discrete agricultural activities and property letting activities and which would not otherwise secure IHT in full without appropriate restructuring.
• Writing life and pension policies into trust and/or making appropriate nominations, to ensure that any death benefits are held within an appropriate IHT-free environment – rather than it forming part of your estate and being taxed to IHT at 40%.
• Everyone knows that each individual has a personal NRB allowance, and some know about the ability to transfer any unused NRB from the estate of their predeceased spouse.  But, many overlook the ability to claim (in total) three or even four NRB’s where a widow(er) later remarries.  Although a maximum of one transferrable NRB can be claimed on the second death, arrangements can be made to secure additional NRB’s – e.g. by utilising your own NRB in your lifetime or incorporating a NRB trust into the will.

Always considered in conjunction with IHT, is Capital Gains Tax (‘CGT’). When an asset is retained until death, it is rebased to the market value at the date of death for CGT purposes.  The rationale behind this is to prevent a double-taxation of both IHT and CGT upon the same asset.  However, CGT should be considered where assets are gifted/sold/otherwise disposed of in lifetime as it assesses the gain made between the historic ‘base’ cost (typically the acquisition cost) and the disposal cost (usually the sale proceeds) – and takes into account certain allowable costs, limited reliefs and an annual exemption to mitigate the chargeable gain.  

Wills

Without a will in place, your estate passes in accordance with the laws of Intestacy.  These rules (i) address estate succession to the abandonment of the tax consequences (including more IHT-beneficial arrangements); (ii) benefit estranged (but more closely-related) family members in priority to others (e.g. unmarried cohabitees are given no rights); and (iii) even if married (but with children) can result in the children receiving a portion of the estate over the surviving spouse.   

In addition to the above, there are various other advantages to signing a will – some of which are:

• It gives you the control to choose who is appointed as your executors and trustees – i.e. the individual(s) responsible for administering your estate and acting in the trusts created by your will, respectively.  You can even (provided you have the appropriate trust powers) by your will, name successor trustees of any existing lifetime settlement of yours, whose appointment will take effect following your death.
• It enables you to incorporate trusts into your will – which could ultimately span multiple generations of your family.  Discretionary trusts can be particularly useful where your beneficiaries include young or financially immature individuals who may squander cash lump sum inheritances, or there are risks of inheritances being dissipated pursuant to any beneficiary’s involvement in divorce or bankruptcy proceedings at the time of your death.  In these instances, your trustees could keep hold of those assets until such time that your loved ones are more ‘settled’ in life to receive their inheritance, or until then either make loans to them or buy assets in their name instead of providing cash lump sums.  A private letter of wishes is usually prepared by your legal adviser to sit alongside such wills, which you can tailor as much as you like, to guide your trustees as to how you would like them to manage the trust fund.
• For couples, a NRB trust could be incorporated in both wills but which would only take effect on the first death.  Assets up to the available NRB of the first spouse to die would pass into this trust.  This is a valuable mechanism where there are assets that may achieve substantial capital growth over time (e.g. land with development potential).  It is more beneficial for that growth to be outside of the survivor’s estate for IHT purposes, particularly considering the alternative approach (of the surviving spouse receiving the assets outright and claiming the first spouse’s NRB on their death) is unlikely to produce the same savings – in light of the NRB being fixed at £325,000 since April 2009 and which will remain as such until at least April 2026.
• A NRB trust can also be utilised on the first death to minimise the value of the surviving spouse’s estate, so that the residence nil rate band (‘RNRB’) is available in full/to a greater extent on the second death.  The RNRB (currently £175,000 per individual) tapers-off by £1 for every £2 the joint estate exceeds £2m.  Therefore, a NRB trust is a useful planning tool for couples whose joint estate just exceed this threshold.
• Second, blended families are perhaps considered the ‘new normal’ in modern times.  One way that wills typically cater for the surviving spouse’s needs, but ultimately look after the children from an earlier marriage, is for the surviving spouse to be granted a life-interest in segregated funds (or even the entire trust fund) by the will of the first spouse.  This would afford the surviving spouse with a right to trust income or to reside in trust property, as well as the ability to call upon capital if agreed by the trustees.  The bulk (if not all) of the capital is preserved for the direct descendants of the first spouse (but which passes to them after the surviving spouse’s death). 
• You can appoint legal guardians for your minor children in your will, in the event of your death whilst they are still minors. 
• You can make bequests of smaller cash legacies or personal items (e.g. jewellery) to specific wider family members, friends or charities.
• You may wish to make provision to look after any pets of yours.
• Jointly held property (such as bank accounts or ownership of a house held as ‘joint tenants’) passes outside the terms of the will.  During the process of writing a will, your assets will be considered and (where appropriate) arrangements made to sever the joint tenancy and adequate provision made in the will.  Commencing the process of writing a will typically instigates wider estate planning considerations that may otherwise have been left unaddressed.
• Writing a will should help you consider the succession of any cryptocurrencies you possess.  Once considered a scam, they are now a permanent feature of the financial landscape – it was reported by the Financial Conduct Authority in June 2021 that an estimated 4.4% of the adult UK population now own a form of cryptocurrency, and in September 2021 El Salvador became the first country to adopt Bitcoin as legal tender.  Unfortunately, there is no central register (e.g. there is no share registrar or HM Land Registry equivalent) at which your title to your cryptocurrency is recorded.  Cryptocurrency is instead owned by whoever possesses the private key, but this has obvious risks – indeed it was reported some years ago by a blockchain analysis company, Chainalysis, that approximately one fifth of Bitcoin has been lost forever due to mislaid keys and passwords.  When writing a will, arrangements should be made to supply the executors with the relevant keys and passwords to prove ownership of the cryptocurrency at the owner’s death.  Typically, advice will extend to the taxation of cryptocurrency on death, and their management where trusts are incorporated in the will.  

Post-death variations

Even after death, it is possible for your beneficiaries (whether inheriting by will, intestacy or property held as ‘joint tenants’ by the doctrine of survivorship) to alter the succession of your estate – such as by:

• Varying (all or part of) their inheritance in favour of another person.  Provided certain statutory conditions are satisfied, then that variation can be treated as having been made by the deceased for IHT (and some CGT) purposes.  This is carried out by way of a Deed of Variation, and one common reason for doing so is to pass wealth down to the next generation IHT efficiently.  For example, a beneficiary who was wealthy in their own right may vary their inheritance in favour of their children.  If the original beneficiary accepted the inheritance then it would inflate the value of their own estate for IHT purposes, and if they later gifted those funds to their children (and died within 7 years of this) then those gifted funds would still be ‘caught’ by the IHT net.  By varying their interest instead, the asset passes to the right persons, and since the gift is treated as having been made by the deceased it has no ensuing tax consequences.
• Disclaiming their interest - usually by way of a Deed of Disclaimer.  However, the disclaiming beneficiary cannot choose who benefits instead (for that a Deed of Variation is required) and they must disclaim their entire interest.

Care must be taken to ensure that any post-death variations are genuine.  For example, any attempt to vary an inheritance in favour of the deceased’s spouse to secure spouse exemption for IHT, but which are later gifted back by the spouse to the original beneficiary is unlikely to be considered a bona fide variation.

Risks

There are a number of risks to bear in mind in the context of your succession planning.  These include, but are not limited to, the following:

• When considering an estate planning strategy containing an element of gifting, it is important to ensure that you do not inadvertently benefit from the gifted asset in the future.  If you continue to derive a benefit from any asset given away, then it will still form part of your estate at death for IHT purposes – this is called a ‘gift with reservation of benefit’.  The most common example are gifts of the family home to children, which the parents continue to reside within until death.  Not only are such arrangements unsuccessful for IHT planning, but the disposal is still a CGT event.  More importantly, when the donee later disposes of the asset their chargeable gain is far greater (i.e. not by reference to the market value at the date of death, but rather to the value at the date of the gift) and particularly where property is involved, the gains can be considerable.  It is possible to pay a commercial market rent for periods of occupation (or benefit) to try and circumvent these issues, however this is strictly reviewed – e.g. failure to pay rent for each period of benefit or failing to increase the rent over time so as to pay a proper market rent would bring that asset back into account for IHT purposes.
• A will is automatically revoked upon the testator marrying or entering into a civil partnership (unless the will had been made in contemplation of that union).  A divorce or a dissolution of a civil partnership however does not automatically revoke the will, but rather revokes those parts that mention the ex-spouse/civil partner – leaving the rest of the will intact.
• The legitimacy of a will can be challenged where (i) the testator did not possess sufficient mental capacity when making their will, or (ii) they lacked knowledge or approval of the contents of their will or have been subject to the undue influence of a third party.  There is a well-established test for the former, whereas the latter hinges on a question of fact.  Instructing a qualified legal adviser to prepare your will (who will be alive to these risks) should prevent any such claims from gaining traction.
• Even where the will (or intestacy) is legally valid, it is possible for the Courts to order reasonable financial provision out of the deceased’s estate for their family/dependants if a claim is made under The Inheritance (Provision for Family and Dependants) Act 1975, and the Court considers it just.  The Court will balance the (current and likely future) financial resources and needs of the litigant with the existing beneficiaries of the estate (as well as any other litigant making a claim) in the context of the deceased’s estate.  Further, the Court will consider factors such as (i) the deceased’s obligations and responsibilities towards the litigant(s) and beneficiaries; (ii) any relevant conduct of the litigant; and (iii) the duration of marriage/civil partnership/cohabitation and any contributions made by the litigant during that period to the welfare of the deceased’s family.  The award may take the form of a capital sum, income, deferred payments and/or a trust structure.  As an example, the Court are more likely to make provision for someone who was financially maintained by the deceased in priority to an independent adult child of the deceased with their own resources.

How we can help

Succession planning is a complex and wide-ranging topic that is subject to regular regulatory change.  It is important to ensure that a holistic strategy is formed that considers all of; (i) tax planning and consequences; (ii) estate succession; (iii) control; (iv) current and future needs/wishes; (v) asset protection and/or flexibility; (vi) income needs; (vii) attitude to risk; and (viii) administration requirements, and more.  Most importantly, this should be reviewed both on a regular basis and upon the occurrence of major life events. 

For more information, please contact Henry Fea