Contents
03 What will the new Residence Nil Rate Band (RNRB) mean for me?
05 Heart vs Head: Making sense of cohabitation
07 Family businesses: `Reboot' and show your resilience
08 In celebration of our inheritance rights
09 Back to basics: Trusts and the role of a trustee
Welcome to the Summer edition of Wealth Matters, our regular publication for UK clients. Wealth Matters acts as your update on contemporary legal issues and tracks the ever-changing UK legal landscape. Now, more than ever, it is important to remain informed of the potential legal pitfalls and opportunities. If you have international interests, we would encourage you to visit our website at charlesrussellspeechlys.com where we frequently publish updates on issues which may affect you.
Charles Hutton, Partner
charlesrussellspeechlys.com London | Cheltenham | Guildford | Bahrain | Geneva | Luxembourg | Paris | Qatar | Zurich
Wealth Matters Summer edition Note from the Editor
Note from the Editor
It has been a tumultuous few months for Private Client lawyers since our last issue, to say the least.
In this issue, we review the recent introduction of the inheritance tax Residence Nil-Rate Band and consider how to ensure your estate benefits from it in full.
The status of cohabiting couples (the fastest growing family group in the UK) is awash with uncertainty and common misconceptions. We look at the legal considerations and hope to add colour to some of the grey areas.
Have you ever thought about leaving a gift in your Will to charity and what would happen if the gift is later challenged? Sally Ashford speaks to Maria King, Head of Legacy Management at Cancer Research UK to highlight our rights in this area.
Family businesses are at the heart of the UK economy, making up some two thirds of all businesses. Here, we discuss our most recent independent research which suggests this business model is under threat and owner-managed businesses need to address generational transition as early as possible.
Finally, our Back to basics column takes a look at trusts and the role of trustees.
If you would like to read our insights on specific topics in future issues, please let me know.
Charles Hutton Partner
T: +44 (0)20 7427 6737 charles.hutton@crsblaw.com
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Wealth Matters Summer edition Note from the Editor
News in brief
Charles Russell Speechlys launches in Hong Kong and Dubai Charles Russell Speechlys has opened new offices in Hong Kong and Dubai. Charles Russell Speechlys Hong Kong will run in association with a newly established Hong Kong law firm under Jonathan Mok, who practises in all areas of family disputes. Richard Grasby also joins as Partner, adding further weight to the firm's private wealth expertise. In Dubai, Ghassan El-Daye joins as Partner, specialising in all forms of dispute resolution and will be joined by Jonathan Brown, a leading dispute resolution Partner who focuses on Maritime, Transport and Trade.
The firm's move into Hong Kong and Dubai fit squarely within its international expansion strategy as it further extends its ability to support the world's leading creators and owners of private wealth, their families and enterprises across the full spectrum of business and personal needs.
Showing off We are thrilled to announce Jessica Stafford, an Associate in our Trusts & Estates Disputes team, has been awarded a STEP Worldwide Excellence Award for achieving the highest mark in the UK in the STEP administration of trusts exam. STEP is the most revered body for tax & trusts practitioners.
New experience for our art law practice This month we welcome Ludovic de Walden, a well-known art litigator who joins from Bird & Bird where he was Joint Head of its Dispute Resolution Group. Over the last 15 years, Ludo has developed a particular reputation for art-related litigation, with clients ranging from galleries and museums to auctioneers, dealers and collectors. On joining, Ludo said: "I am delighted to be joining a firm with such a deep and respected knowledge for advising clients with private wealth, and look forward to expanding our art law practice further."
Proposed changes to probate fees The last Government announced proposals to increase the court probate fees payable on death. The fees would be charged by reference to the value of the estate passing through probate, up to a maximum of 20,000 for estates worth over 2m. The proposals were not passed before the dissolution of Parliament in May. It remains to be seen whether the next Government will reintroduce the proposals. Further news will follow in due course.
Special luxury brands event In April, our Retail & Leisure group hosted a showcase of 10 young but fast-growing brands in the world of luxury retail at our office in London for our clients. Businesses included Sussex winemaker Nyetimber and ex-City entrepreneur Polly McMaster's brand `The Fold'. If you would like to attend events like this in future, please get in touch with the Editor.
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Wealth Matters Summer edition What will the new Residence Nil Rate Band (RNRB) mean for me?
What will the new Residence Nil Rate Band (RNRB) mean for me?
Effective from 6 April 2017, the new residence nil rate band (RNRB) may allow you to leave your home, or a share of it, free of inheritance tax (IHT) to your descendants.
The RNRB is in addition to the nil rate band (NRB) of 325,000, which means that in total many married couples (and civil partners) will be able to leave up to 1m to their children and grandchildren tax free from 6 April 2020.
However, the relief is not nearly as generous as it first appears; it will not apply at all if you are 'too wealthy' or your assets do not pass to direct descendants. We recommend that clients review their estate planning, including their Wills and lifetime gifts, to ensure they take maximum advantage of the RNRB where possible.
What is the RNRB?
The main points are as follows:
l The RNRB is designed to allow individuals to leave (a share of) their residence to direct descendants free of IHT.
l The RNRB starts at 100,000 in 2017/18 and will rise by 25,000 each year until it reaches 175,000. So from 6 April 2020, a married couple could share 350,000 worth of RNRB as well as a combined NRB of 650,000.
l The property must actually have been owned by the deceased as his residence at some point. So a buy to let would not qualify, but a property that was occupied by the deceased and subsequently let would qualify. There are special provisions that apply on downsizing where the home was sold after 8 July 2015.
l The share in the property must be left to `qualifying beneficiaries' which includes children, grandchildren, stepchildren and spouses of each of each of these. In certain cases, trusts for the qualifying beneficiaries will be included but care needs to be taken with trusts written into Wills, as not all trusts will qualify.
When is it in force? The RNRB applies to those who die on or after 6 April 2017. For married couples, so long as the second death occurs on or after 6 April 2017, the second estate will also have the automatic benefit of the first to die's allowance 'brought-forward', even if the first death occurred before 6 April 2017.
Am I too wealthy? We would all like to be too wealthy! The benefit of the RNRB is reduced by 1 for every 2 by which the deceased's estate exceeds the threshold of 2m. In practical terms, this means that from 6 April 2020 married couples with a joint estate exceeding 2.7m (or 2.35m for a single person) will get no benefit from the RNRB.
If your assets are worth c2m - c3m, then there are a number of ways you could reduce your estate to beneath the threshold, either by gifts during lifetime or on the first death, so that the valuable RNRB can be maximised.
For example, Mr and Mrs Green have a house worth 2m and other assets worth 500,000. Assume they die once the RNRB is fully in effect. If everything passes to the survivor on the first death, the IHT on the second death will be as follows:
Total estate Less
2,500,000
2x NRB 2x RNRB (reduced by 250,000) 1,750,000
650,000 100,000
IHT will subsequently be applied to this value at 40% which is equivalent to 700,000.
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Wealth Matters Summer edition What will the new Residence Nil Rate Band (RNRB) mean for me?
They should consider making gifts, either during their lifetimes (if they can afford to) or after the first death, to ensure the benefit of the RNRB is maximised on the second death. Although both of their individual estates are under 2m, their combined estate is too valuable to benefit from the full RNRB.
On the first death, the couple should 'bank' an RNRB by leaving a share of their property to their children or a suitable trust. They should probably leave the NRB to a suitable trust on the first death too. In addition this will reduce the value of the survivor's estate, maximising the amount of RNRB available on his/her death.
The position on the survivor's death will then be as follows:
Total estate 2,500,000
Less assets given away on first RNRB death:
NRB
2,000,000
Less:
Survivor's RNRB
Survivor's NRB
1,500,000
175,000
325,000 500,000 175,000
325,000 500,000
IHT then applied at 40% will be equivalent to 600,000.
So by careful planning, Mr and Mrs Green's family have saved 100,000 of IHT. And, by having suitable Wills, the surviving spouse can still, if required, have access to the assets placed in trust following the first death.
We can assist you with reviewing your Will and advise you on whether you should amend it to maximise the RNRB.
We recommend that clients review their Wills and estate planning now.
If a death has already occurred, it is important to take advice as soon as possible, as there is a two year window of opportunity to take steps that might capture the RNRB. Moreover, if some or all of your home is already in a trust, then advice should definitely be sought as soon as possible as action may need to be taken during your lifetime in order to secure the RNRB.
Please contact us for advice on these areas.
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Wealth Matters Summer edition Heart vs Head: Making sense of cohabitation
Heart vs Head: Making sense of cohabitation
Do you live with your partner? Are you unmarried?
Cohabiting couples account for 16.4% of UK families today (that's nearly three million people) as more and more people shun traditional notions of marriage.
Despite this, there has been little development in the law to assist a cohabitee in the event of relationship breakdown.
The problem Cohabiting couples are the fastest growing family group in the UK, with numbers doubling in the last 20 years. A growing number of couples decide to live together either as an alternative or precursor to marriage.
Common law spouses There is a common misconception that unmarried couples who live together as 'husband' and 'wife' will eventually acquire the same legal rights as a married couple. This is not the case.
There is no statutory code governing the breakdown of cohabiting couples and, unlike divorce, no notion of reasonableness or fairness when it comes to dividing up the assets. In addition, unlike a marriage situation, there is also no right to maintenance when a cohabiting individual separates from their other half.
So, if this scenario is a possibility for you, then please read on ...."My son/daughter is about to move in with their partner and I want to make sure their share of the house is protected in the event of a future break-up."
Helen and Oliver moved in together soon after university. As Oliver already had a job, he paid the deposit on their house purchase and it was transferred into his sole name. Since then, Helen's career has taken off.
Over the last 10 years she has paid the majority of the mortgage repayments as well as the cost of extensive renovations to the house. Their relationship has now broken down and they are arguing over how to split the house.
The breakdown of cohabiting relationships can often lead to complex disputes over property, particularly where the level of contribution changed over the course of a relationship. Even if a couple bought a property together and put in place a 'declaration of trust' identifying the proportions in which the property was bought, this may not be conclusive if the balance of contributions has changed in the intervening years (for example if one party has become the sole breadwinner).
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Wealth Matters Summer edition Heart vs Head: Making sense of cohabitation
Where a property was bought in an individual's name, it may be possible for their cohabiting partner to make a claim against the property if they have consistently contributed towards the house since then on the understanding that they would eventually receive a share. Therefore, in our example, Helen may be able to claim a share in the property but the onus will be on her to provide the evidence of her contributions.
Who paid for the sofa? How do you evidence ownership? Without clear documentation, it can be difficult to recall or evidence financial contributions to a property. It is therefore particularly important for couples to keep good financial records throughout their period of cohabitation.
However, the debits on a bank statement do not always tell the whole story. It is also important to record the couple's intentions in respect of the property.
A cohabitation agreement can assist with this. In our example, Helen could have recorded that she agreed to pay the lion's share of the mortgage payments and fund the extensive renovations on the understanding that half the property was hers.
When can a cohabitation agreement be put in place? A cohabitation agreement can be entered into at any time. The purchase of a new property, moving into a partner's preexisting home or a material change in circumstances (such as a change in one party's earning capacity or a decision to build an extension) are all good opportunities to put an agreement in place.
Cohabitation agreements aren't just for couples in a romantic relationship. They may also be useful where a group of friends decide to purchase a home together.
What would a cohabitation agreement cover? Cohabitation agreements are flexible, bespoke documents which, provided they are carefully drafted, are legally binding. They can cover a number of issues such as:
l the parties' contributions towards, and share in, any property purchase;
l ascertaining how this will change in the future should the couple's financial situation alter;
l ongoing financial contributions towards the property and outgoings;
l determining what will happen to any property in the event of separation; and
l setting out what financial support, if any, will be available to the cohabitees post-separation.
Each party would need to receive independent legal advice on the terms of the agreement.
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Wealth Matters Summer edition Family businesses: `Reboot' and show your resilience
Family businesses: `Reboot' and show your resilience
We all know that family businesses are the backbone of the global economy, but let's remind ourselves quite how critical they are to our own economy two-thirds of all businesses are owned by families, generating a quarter of UK GDP and employing 12 million people. The future of this business model is however under serious threat, largely due to the impact of technology, as we have shown in some recent research we have published.
While all businesses are affected by fastchanging technology, family firms have also to think about its impact on generational transfer because they need to find the family members who have the skills to lead the business in this accelerating global economy. Finding leaders from the next generation who can keep up with the pace of change and embrace innovation where needed raises the bar and makes the transition to the next generation ever more challenging.
Traditions may be challenged in new ways when people rely on Facebook, Instagram or other social media channels to market themselves, so business owners need to make the firm attractive to those younger family members who have what it takes to succeed. The next generation, who are connected to their peers and an increasingly globalised world through social media and a network of technologies, also need to feel connected to the family business. Attitudes are shifting: members of this connected generation may not want to follow the well-trodden path into the family business there are more opportunities out there for them and they may not receive a huge amount of credit from their peers for just following in mum and dad's footsteps.
It is tempting to think that the very nature of a family business with stewardship transferred from generation to generation is at odds with the digital age.
But that is to overlook the importance of family businesses to the economies of this new world, and their ability to adapt. It is easy to forget that many such businesses have already survived, and prospered, in times of major change and continue to do so.
We have explored how family firms have approached the challenges of the digital age and our recent research involved us speaking to leading academics, national and international family businesses and their advisers. Our newly published report 'The Connected Generation: Rebooting family business succession for the digital age' makes interesting reading, in many ways debunking the stereotype that technology is necessarily only the remit of the `next generation'.
Many of those we talked to, from both the older and younger generations, emphasised the importance of taking the time out to think long and strategically and to learn from the shared experiences of others who have trodden the same ground and succeeded.
This is critical since the accelerated pace of change brought about by technology is requiring a new approach a professionalising of the business at an early stage, and a greater emphasis on the right structure and governance more generally, as well as succession.
To keep innovating, and make a success of transition, family businesses must do two things:
1. Make transition more collaborative and open so that the next generation feel they can make a difference and test their ideas;
2. Create a framework to introduce potential next generation leaders to the business and manage the complex legal and emotional issues involved in transition.
As well as this report, we have produced a comprehensive guide 'Connecting generations: a guide for entrepreneurs and family businesses'. This examines the greatest challenges around succession faced by our family business clients at different stages of their development, and is packed with practical guidance to steer you through. Please email the Editor for a copy.
Our five practical tips for bringing in the next generation to your family business:
1. Teach them by example when they are young it's never too early to start and pay them to work in the business at weekends and on holidays
2. Send them on a `next gen' course to teach them relevant leadership and entrepreneurial skills
3. Listen to their passions and identify ways they can express them in the context of the business; see how the business can adapt to encourage their participation
4. Ask them to help you solve a technology-related problem or run a social media campaign; give them ownership of it and the resources to do it
5. If they say they don't want to join the business now, try to avoid ultimatums; encourage them on their path and keep an open mind about where they might fit in the business later.
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Wealth Matters Summer edition In celebration of our inheritance rights
In celebration of our inheritance rights
There has been much recent media coverage on the decision by the Supreme Court in March 2017 to reverse a Court of Appeal decision on a case won by an estranged daughter contesting her mother's Will, which left her estate to charity. The daughter, Mrs Ilott, won the Court of Appeal case, despite the fact that her mother had provided in her will that her estate should pass to three animal charities. The long running case has caused ripples in the charity sector and concern for those making Wills that their wishes may not be upheld, particularly where family relationships are strained.
The Supreme Court judgment to reverse the decision has been heralded as positive confirmation of `testamentary freedom' or the ability to choose for ourselves who should inherit our assets on our death. Naturally, this could be family, friends or charity.
We advise a large number of charities and partner Sally Ashford spoke to Maria King, Head of Legacy Administration at Cancer Research UK to explore the impact of this case and the recent decision for Cancer Research UK.
Q : "This case has been ongoing for a number of years. What have been CRUK's main concerns over the period? Have you experienced a fall in gifts to the charity in this time or a worry in the minds of those considering gifting?" A: "Whilst we haven't experienced a fall in gifts to Cancer Research UK through Wills, we have seen an increase in the number of claims made against these legacy gifts. After the last Court of Appeal judgment suggested legacy giving was a `windfall' for charities, supporters were also concerned about the extent to which their gifts to Cancer Research UK would be effective. We suggested practical steps supporters could take at the will writing stage, such as advising us of their legacy pledge, their reasons for making it, and where possible demonstrating on-going support for Cancer Research UK."
Q: "Can you describe CRUK's reaction to the recent Supreme Court ruling?" A: "We are very pleased that our supporters have much needed reassurance that, in general, they are free to choose who will inherit their property when they die. Around 6,000 generous supporters choose to leave a gift in their Will to Cancer Research UK every year, which funds over a third of our life-saving research. We're extremely grateful for each and every legacy gift, and for the Supreme Court's clarity that wishes in a will do matter, and that a supporter's decision to leave to charitable causes they care about should be respected."
Q: "What would your advice be to those who wish to leave funds to charity in their Wills whether that be CRUK or any other UK registered charity?" A: "To have their Will professionally prepared. Not only should this provide comfort to the supporter around the accuracy of drafting, but bespoke advice can be provided on any areas of potential challenge and practical steps taken around this. We'd also recommend that, where possible, a supporter lets their family know of their intention to leave part or all of their estate to charity, and it remains helpful to demonstrate an on-going connection with any charities concerned."
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Wealth Matters Summer edition Back to basics: Trusts and the role of a trustee
Back to basics: Trusts and the role of a trustee
Put simply, a trust comes into existence when someone (`the settlor') puts assets into the name of another person (`the trustee') for the benefit of others (`the beneficiaries').
The purpose of a trust is to separate the legal ownership of assets from the beneficial ownership. Trusts have a wide range of uses, for example:
l Asset protection to help control and protect family assets,
l To effectively manage assets which otherwise might be under the direct control of a minor, vulnerable or incapacitated person,
l To facilitate tax planning, l To facilitate the next stage of
succession for the management of a business or family wealth.
How does a trust come into existence? Generally speaking a trust will be created by a document (often called a trust deed) which sets out the rules by which the trustee has to manage the trust assets. The trust deed will also identify the beneficiaries and set out the powers of the trustees.
Types of trust There are different types of trust which can be created and the tax implications of each vary. Two of the most common types are:
Discretionary trust This gives the trustees discretion as to how income (e.g. interest and dividends) and capital (e.g. sale proceeds or property) of the trust are applied among the beneficiaries.
In a discretionary trust the beneficiaries do not have a specific right to any trust asset but must rely on the trustees' decision as to who benefits, to what extent and when.
In reaching a decision the trustees should take into account any wishes made known to them by the settlor (usually in a Memorandum or Letter of Wishes).
Interest in possession (or life interest) trust This obliges the trustees to pay the income from the trust assets to the beneficiary with the interest in possession. Usually there is also a power to pay that beneficiary capital at the trustees' discretion and also to alter the terms of the trust to benefit other beneficiaries.
Duties of the trustees `Fiduciary duties' are imposed on trustees which means they have to act reasonably and with good faith. As the trustees control and manage the trust assets for the benefit of the beneficiaries they must act impartially and consider the best interests of all the beneficiaries. In particular this means they must:
l act with reasonable care and skill
l know which assets are owned by the trust and make sure they are kept safe
l regularly review any trust investments and consider diversifying or reinvesting often it will be appropriate to seek professional investment advice
l keep records and accounts in order to show that the trust is being managed properly
l file any necessary tax returns and deal with any other tax compliance
l act unanimously unless the trust deed states otherwise.
How can we help? We can advise on the setting up of trusts of all types their suitability and the tax implications.
We also offer an extensive range of services to our trustee clients and maintain an experienced trust and probate management team to help administer UK resident trusts. In particular, we support trustees in the management, accounting and tax issues they face, including:
l providing professional trustees, including our own dedicated trust corporation
l preparing trust accounts and financial statements
l handling the trust's cash, and liaising with investment professionals to arrange sales, purchases and other transactions
l managing all the trust's tax affairs, including calculating tax liabilities, meeting HMRC compliance requirements and dealing with beneficiaries' trust tax affairs
l recording the trust's investment policies and monitoring investment performance, and
l holding trustee investments in our nominee company, in separately designated accounts.
This article is part of a mini-series on explaining how trusts work and in our next edition of Wealth Matters we will be looking at different scenarios in which they might be appropriate.
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Wealth Matters Summer edition
Who to contact
If you are interested in more information about anything you have read in this newsletter, please contact your usual Charles Russell Speechlys contact, or alternatively:
William Begley Head of Tax, Trusts & Succession T: +44 (0)20 7427 6540 william.begley@crsblaw.com
Ian Cooke Head of Private Property T: +44 (0)20 7203 5261 ian.cooke@crsblaw.com
Sarah Higgins Head of Family T: +44 (0)20 7203 5102 sarah.higgins@crsblaw.com
Our UK offices
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This information has been prepared by Charles Russell Speechlys LLP as a general guide only and does not constitute advice on any specific matter. We recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of this information. Charles Russell Speechlys LLP is not authorised under the Financial Services and Markets Act 2000 or by the Financial Conduct Authority, but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society of England and Wales, which is a designated professional body for the purposes of the Financial Services and Markets Act 2000. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. For information as to how we process personal data please see our privacy policy on our website charlesrussellspeechlys.com.
