Stop looking at succession planning just through prism of IHT

The latest inheritance tax report from the UK’s Office of Tax Simplification (OTS) was published in July 2019.

The government department was tasked by then-chancellor Phillip Hammond to review a wide range of the administrative and technical aspects of IHT.

The first report, published in November 2018, covered the administrative aspects of IHT, such as reducing the administrative burdens on estates and giving consideration in digitalising and simplifying inheritance tax returns.

This second report explores the main complexities and technical issues, culminating in 11 recommendations focused on lifetime gifts, IHT’s interaction with capital gains tax, and businesses and farms.

It concedes IHT is a ‘deeply unpopular tax’ and many of the recommendations made by the OTS will be welcomed, writes Kleinwort Hambros’ Andrew Dixon.

Drive voter behaviour

Two of the more favourable suggestions are to reduce the potentially exempt period from seven to five years, albeit with the loss of taper relief, and proposals to increase the annual gift allowance from £3,000 ($3,940, €3,552), which has remained at its current level since its implementation in 1981.

With publicity often given to the ‘static’ nil rate band, it seems remarkable that the annual gift allowance has not changed in nearly 40 years.

In the UK, IHT invokes strong emotions and will often drive voter behaviour.

However, while we tend to view succession planning through the prism of IHT, it is important not to lose sight of your client’s financial legacy in the broader context.

Over the next 30 years we are likely to experience the largest wealth transition in history.

During this period, studies estimate over $30trn (£22.8trn, €27trn) will move from one generation to the next.

Some of this wealth will be passed down in countries with death duties similar to those in the UK and some will pass in countries where death duties are insignificant or do not apply.

Prior to tackling tax

But many families face the same issues irrespective of their countries’ approach to death duties.

I am not advocating ignoring the impact of IHT, but much more is gained through an all-encompassing strategy which attempts to address your clients’ key objectives and concerns prior to tackling tax.

While not an exhaustive list, some common questions for clients to consider are:

• Where will I draw from to meet my lifetime expenditure?
• How do I feel about lifetime gifting?
  1. – How will the gifting affect the recipient?
  2. – Do I want to make gifts for a specific purpose (ie helping children on the property ladder)?
  3. – Would I like to see wider enjoyment of family wealth during my lifetime, if so, how do I ensure I do not give too much?
• How will you motivate and educate the next generation?
• How much access and control do I wish to retain?
• How can I avoid conflict (second marriages, sibling vs spouse and the new generation)?
• What is the best way, given my own circumstances, to protect my assets for future generations?
• Do I want to ensure fair division of my estate (particularly where children enter the family business), how can this be achieved?
• Do I want to create a charitable legacy? Should it include wider involvement of the family?

Taking time to consider the answers to these types of questions will help advisers to create a sustainable platform for managing family wealth during their client’s lifetime and beyond.

Cross-border now ‘business as usual’

More so then previous generations, families are now truly global with assets or family members located in more than one jurisdiction.

Cross border issues are now ‘business as usual’ for practitioners who continue to offer uniquely designed structures to navigate them, and further preserve and safeguard the families’ wealth.

While it may seem logical to focus on this purely through the lens of IHT, certainly for UK individuals, a key component of advising on family wealth is recognising the different relationships between family members, which can become dysfunctional unexpectedly (often due to competing loyalties) and even litigious, resulting in siblings ‘at war’.

In the case of the latter, these may last for years, decades or indeed lifetimes.

Additionally, as advisers, we come across situations where, following divorce or death, relationships within families can become broken beyond repair.

These negative influences in the context of a family’s ‘wealth’ invariably result in unintended depletion. How can this be avoided?

Advice which emphasises strategy and governance over tax should lead to more sustainable outcomes.

This article was written for International Adviser by Andrew Dixon, deputy head of UK and international wealth planning at Kleinwort Hambros.