The Great Wealth Transfer | Current trends and planning opportunities

Authored by Rachel Mayston, Senior Associate
Thomas Snell & Passmore

For affluent families with business interests, property portfolios, trusts, offshore structures, fine art, or insurance-related wealth, succession planning has become increasingly complex. Changes to tax legislation, combined with reduced reliefs, have significantly altered the estate planning landscape.

Although they are not in control of how wealth will pass down from their parents, the next generation should be aware of current estate planning issues, structures and what they can do to ensure the preservation of family wealth.

Reduced Reliefs and increased taxation

One of the most important recent developments is the restriction of Business Relief (BR) and Agricultural Relief (AR). Historically, qualifying business and agricultural assets could be passed on free from inheritance tax (IHT) without limit. This made BR and AR highly effective tools for trading business owners and investors in qualifying assets such as AIM shares or a Lloyd’s of London investment.

Now, these reliefs have been severely capped. Individuals can now only pass up to £2.5 million of qualifying assets free of inheritance tax, with any excess assets receiving only 50% relief. For lifetime gifts, the £2.5 million allowance resets every seven years, which does create planning opportunities for staged gifting strategies.

These changes also reduced the rate of relief that applies to AIM shares from 100% to 50%. The other significant change is the application of IHT to pensions. Previously the general estate planning advice was to invest as much as possible into pensions and live on other sources of wealth as a pension could pass inheritance tax free to children.

These rules change from April 2027, with pensions becoming subject to IHT (in addition to already being subject to income tax, if the deceased dies over the age of 75), and individuals are more commonly being advised to consider spending their pension before other assets, due to the potential for double taxation. This may enable other assets to be given away during their lifetime.

The main impact of these changes is the need, in many cases, for parents and grandparents to begin passing on wealth earlier and often, by making outright gifts and/or using different structures, so that control can be handed over gradually and appropriately.

Family investment companies

Family Investment Companies (FICs) remain a popular succession planning tool. A FIC is a bespoke private company used to hold family wealth in a tax-efficient structure. Parents generally seed with or lend cash to a company which then invests that cash on behalf of the family.

The parents can retain control of the FIC in a number of ways, for example by holding shares which have weighted voting rights, or through a separate class of “freezer” share, gradually transferring value to younger generations and getting them more and more involved in decision making. Unlike trusts, FICs are not subject to periodic IHT charges every ten years, which makes them attractive.

As FICs generally hold investments, the shares do not qualify for BR. By contrast, a trading company, or a company containing a Lloyd’s of London investment would qualify for BR up to the new limit of £2.5million, with any remaining value being subject to IHT at a 20% rather than the full 40%.

Trusts

Trusts also continue to play an important role, particularly when families want to protect assets from risks such as divorce, bankruptcy, or family disputes. Often control over the assets is retained by the parents as they act as the trustees of the trust, however children can also be trustees, and in either case could be included when discussing significant decisions regarding the trust.

Generally, individuals are limited to transferring £325,000 (and couples £650,000) into trust before there is an immediate lifetime charge to IHT. Although this transfer can be repeated every seven years, it takes a long time for a significant amount of wealth to transfer. However, when qualifying business assets are transferred into trust, BR applies enabling up to £2.5 million of qualifying assets to be transferred into trust every seven years. This makes trusts an interesting planning tool for business owners looking to reduce the value of the business assets in their estates but not being in a position (for whatever reason) to simply give assets outright to the next generation.

Trusts have their own taxation system such as IHT charges (at a maximum of 6%) every ten years (and when assets leave the trust) and the reduction in BR and AR has limited the availability of these reliefs within a trust. But the rates of IHT are much lower than if the assets were held by an individual on death so trusts are still worth considering as part of an overall estate plan.

Other planning options

Beyond outright gifts, corporate structures and trusts, there are a number of additional reliefs and exemptions available. Regular gifts made out of excess income can be immediately exempt from IHT if certain conditions are met, meaning there is no need to survive the gifts by seven years. This exemption may be particularly useful for those looking to reduce the value of their pension. It is also useful for those with a very large amount of income as the exemption is without limit, so regular payments can be made enabling transfers of more than £325,000 into trust in any seven year period, without suffering an IHT entry charge.

Education trusts can help fund future school or university costs while moving assets outside the estate for IHT purposes. Again, if certain conditions are met, assets transferred into these types of trust are treated as immediately outside the estate for IHT with no need to survive seven years.

Certain heritage assets, including important artworks or collections, may also qualify for IHT relief if they are considered to be nationally significant and preserved for public benefit. This allows owners to reduce or defer IHT, provided the specific requirements are met.

What should the next generation do now

For those on the receiving end of the “Great Wealth Transfer”, understanding the family structure and overall strategy is key to the responsible stewardship of family wealth for the future.

This will include:

• If appropriate, discussing planning options with parents who may have been too busy building wealth to have considered how it can be passed on in a tax efficient way.
• Learning how family trusts, companies, partnerships, and investments are structured and operate.
• Discussing opportunities to take on more important roles within the family structure rather than waiting for a seismic life event such as death or incapacity.
• Reviewing their own wills and other succession frameworks. When there is significant family wealth, it is never too early to ensure everything is in order.
• Learning basic tax principles to help understand any estate planning which is in place and to enable them to carry out their own estate planning in time.
• Building relationships with advisers early. Lawyers, wealth managers, accountants and trustees should not be strangers encountered after a death.

Professional advice

This is only a very brief summary of recent trends in estate planning, mainly focussing on IHT. It should be noted that gifting strategies must also take account of CGT and other relevant taxes. This is why it is always important to take specialist estate planning advice before carrying out any planning, as the rules are strict and the price of getting them wrong can be very high.