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This article discusses the importance of succession planning and provides strategies and tools to help with the process. It covers topics such as lifetime gifts, trusts, business reliefs, and incorporation.
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Lifetime gifts, trusts and business reliefs, companies and partnerships Alison Robinson Partner – SafferyChampness, Harrogate 19 September 2019
Succession planning • No one size fits all – genuinely bespoke • Where to start? • Where are you now? • Where do you want to be? • Timeframe – longer the better • Quick wins? • Long term strategy • Communicate!
Tools to help • Holdover/rollover • CE • Maintenance Funds • Spouse exemption • PETs • APR • BPR • ER • Trusts • Chattels exemption • Gifts • Incorporation
Case study - Background • Roger and Susan (H&W) • 2 children – Peter and Mary • 1,000 acre in hand (contract farmed) in farming partnership (Roger & Susan) • 500 acres land on FBT with development potential (Roger) • 500 acres land let to farming partnership (Roger) • 15 cottages (Roger) • Historic House – open to the public (Roger) • Large portfolio of shares (Roger) • House in London (Roger)
Case study – background continued • Roger works in London and lives there in the week with Susan. London House is PPR • Roger will get a defined benefit pension from his job • Roger is 20 years older than Susan and wants to provide for her in the future • Peter is to inherit the estate • Roger and Susan want to be fair to Mary • Currently prepare accounts separately for: • Farm partnership • House opening trade • Rental income
Case study – current position - IHT • 1,000 acre in hand in partnership – 100% BPR • 500 acres land on FBT with development potential – 100% APR on agricultural value • 500 acres land let to farming partnership – 100% APR • 15 cottages – No relief • Historic House – open to the public – CE? • Large portfolio of shares – no relief • House in London – no relief
Case study – quick wins? • Transfer FBT land with development potential into partnership – ‘land capital’ account • Take prior charge on profit equivalent to rent if funds needed • No SDLT as connected parties • Result – 100% BPR on full value rather than APR on agricultural value only • Why?
Case study - BPR • Businesses with mixed activities can be useful to obtain relief for property that wouldn’t of itself qualify for BPR • Turnover – Profits – Capital – Time spent – Overall • Assets must be used and owned for 2 years in qualifying business • Land already used for farming – immediate relief
Case study – quick wins? • Cease tenancy with partnership on 500 acres let land • Transfer land into partnership – ‘land capital’ account • Take prior charge on profit equivalent to rent if funds needed • Result – 100% BPR rather than APR • No SDLT – connected parties • Why bother?
Case study quick wins • Introduce cottages into the farming partnership into a ‘land capital’ account • Take prior charge on profit share if funds needed • Business remains ‘wholly or mainly’ trading so BPR on everything including cottages • Ensure correct advisor/solicitor • OTS 2nd report on IHT, 50:50 80:20?
Case study quick wins • Is the historic house on the balance sheet of the house opening business accounts? • Bring into business with the intention of trying to get BPR • Create business plan • Ensure business is ‘commercial’ • Potential BPR on house
Case study – revised position • 1,000 acre in hand in partnership – 100% BPR • 500 acres land with development potential (now in the partnership) – 100% BPR • 500 acres land let to farming partnership (now in the partnership) – 100% BPR • 15 cottages (now in the partnership) – 100% BPR • Historic House – 100% BPR?? CE?? • Large portfolio of shares – no relief • House in London – no relief
Case study – longer term plan • Settle £325k of shares onto DT for Mary • Holdover CGT • Utilise nil rate band • Depending on M’s age shares can be appointed out – H/O • Gifting direct would generate a CGT charge OR • Identify non core property for Mary • Development land trust or gift • Chattels not CE – under £6k (£12k if jointly owned) • Chattels trust
Case study – longer term plan • Bring Peter into partnership • Transfer property to Peter – 100% BPR, Gift relief • Insurance – Joint life 2nd death • MAKE A WILL!! • Spouse exemption • Spouse gift to children
Lifetime gifts • Assets qualifying for APR/BPR – holdover (PET) • Regular gifts out of income • £3,000 annual exemption – use it in 2 years or lose it • Wedding - £1k/£2.5k/£5k • PETs – watch CGT
Other Strategies –Incorporation • Incorporation? • Appropriate businesses • Connected – no SDLT • Incorporation relief – holdover for CGT • Issue new shares to Peter (and Mary?) – growth shares • Future growth in value passes to next generation • Flexible dividends policy • Insure in the meantime
Other Strategies – incorporation • Be sure a company is right for you • Difficult to reverse • Can be expensive to get money out • Additional compliance cost • Loss of privacy • Unlimited company?
Other Strategies – Entrepreneurs relief • £10 million of lifetime qualifying gains taxed at 10% • Available where • Assets sold as part of cessation of trading business • Qualifying shares sold (>5% of trading company) • Consider gifting development land to Mary for her to farm using a contractor (partnership?) • After 2 years ER • Difficulties arise where assets sold and same trade continues Eg part of farm land sold for development • Often possible to restructure business
Other Strategies – Heritage Maintenance Fund • Could consider Maintenance Fund if appropriate • Type of discretionary settlement • Helps to fund the maintenance and upkeep of heritage property • Free of IHT and 10 year charge • Taxed as Settlor or trust rates • Income and capital to support heritage assets OR • Charitable Trust
Summary • Be clear what you want to achieve • Non negotiable objectives • ‘Would like to have’ objectives • Are there any quick wins? • What are the options (usually more than one) • Keep it as flexible as possible – future family changes and tax changes e.g. OTS second report on IHT • Communicate to those involved • Review regularly • Ensure your advisors know what they are doing
Lifetime gifts, trusts and business reliefs, companies and partnerships Alison Robinson Partner – Saffery Champness 19 September 2019