Succession Planning - most effective way to minimise inheritance tax liability
  • 11th Feb 2013
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A number of business clients come to us for advice on the most effective way to minimise their inheritance tax liability whilst still allowing them flexibility for future generations of the family.

Mike, a young business owner has an estate of £3m made up of the family home valued at £300,000, business assets of £2.1m and two life policies with cover of £600,000. Mike wishes to provide security for his wife whilst providing for the bulk of his estate to pass to his minor children in a tax efficient and flexible manner.

Mike was advised to create a life interest of the family property to provide a residence for the spouse with the children to inherit on her death.  Mike was also advised to create a number of pilot trusts during his lifetime each with nominal sum to initially be added to the trusts. We advised Mike to complete a new Will to direct the business assets between the pilot trusts that we created for him. We also advised Mike to create a number of Assurance Trusts and assign the benefit of the policies to them.

If Mike were to die owning and running the business, those assets will be exempt from IHT and can pass into the pilot trusts created during the client's lifetime. Each trust has its own nil rate band for IHT purposes. The business assets within the trust can either be sold or retained. The trusts can be held for the minor children without any IHT implications and can either be retained within the trust, loaned or given to the children in the future providing full flexibility and a vehicle for further planning in the future.  The life assurance policy funds will be paid outside of the client's estate to the trustees of the Assurance Trusts and will also be free of IHT. At the trustees discretion funds can also be used to make financial provision for the spouse should she require additional financial assistance to look after the minor children now or in the future.

A number of individuals are initially put off from creating trusts as they consider them to be archaic or obsolete in modern life.  In reality, this could not be further from the truth. Correctly drafted trusts used in the right context can both provide a vehicle designed to protection assets, provide flexibility and opportunities for future succession planning.

It is vitally important that anyone wishing to create trusts either by Will or during their lifetime receives proper advice as to the tax and administrative implications.

This case study is based loosely on elements from a number of clients’ situations and requirements who have been assisted by Garry Warman, Tax & Estate Planning Partner based at our new Canterbury office. For advice on the use of pilot trusts or Inheritance Tax generally, please speak to one of our Tax & Estate lawyers at our Maidstone, Canterbury or Tenterden offices.

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