Read our story of John: a company owner, spouse and parent who’s thinking about his estate planning. Does any of it sound familiar?
John is in a quandary. A good sort of quandary but a quandary nonetheless.
John is more or less retired. His pension fund and other capital will very likely be enough to see him out. But he and his wife also own a small property investment company. They don’t draw anything from it and probably never will.
But ‘probably’ isn’t ‘certainly’. They regard it as a sort of ‘rainy day’ fund. But rainy days (indeed, monsoons) happen. Care home fees? Healthcare costs? Stock market crashes? Rent controls? You never know what’s round the corner, do you?
Hitherto, John has been resigned to the fact that if he dies without ever touching the value in the company, his estate will pay Inheritance Tax (‘IHT’) on the value of the shares. 40% is a pity but not a disaster: and it’s sweetened by the fact that the shares will on his death be revalued to market value for Capital Gains Tax (‘CGT’) purposes, so at least his beneficiaries will be able to access the value without paying CGT as well. And if, contrary to his expectations, he needs money during his lifetime, he can draw it as dividend or liquidate the company.
But now he’s rethinking. 40% IHT is tolerable – but what if (or when) the Chancellor of the Exchequer makes a grab for more? And hasn’t he read that siren voices have been tempting the Chancellor to review CGT rebasing on death? And what if he needs access during his lifetime? It seems almost certain that CGT rates will soon increase, perhaps even to match Income Tax rates: and what about the tax rates on dividends? The Labour Party manifesto didn’t make any promises on not increasing those, did it? John is feeling distinctly vulnerable on all fronts.
‘I could liquidate the company now and give away some of the proceeds to my children’, thinks John. ‘That would reduce my estate for IHT and capture the gain at current rates. But do I have time to get the value out before CGT goes up?
‘Maybe I could do it the other way round – gift the shares to my children now and leave them to liquidate the company at leisure. They’re trustworthy – I’m sure that if I unexpectedly found myself short of funds, they’d do the decent thing. Hang on, though: they’re married. Much as I love my children’s spouses, it would be naïve to ignore the possibility of marriage breakdown: and I don’t want my rainy day fund to end up as a divorce settlement!
‘How about a trust? That might work. Yes: I’ll set up a trust for the children and give the shares to it. No, wait – there will be IHT to pay as the value is more than our Nil Rate Bands.
I know: I’ll sell the shares for half their value. That will reduce the gift element to a figure small enough to be free of IHT; and it will give me more than enough cash to pay the CGT on the disposal; and it will hedge my bets by giving away only part of the value. And the assets will be protected from any claims on the children. Yes: that sounds like a plan.
‘Wonder what I’ve missed? Better get BKL to give it the once-over.’
Wise man, that John. If any of this sounds familiar, please get in touch with your usual contact at BKL, or send us a message and we’ll put you in touch with one of our experts in personal tax, estate planning and wealth preservation.