Inheritance law and how it affects your business assets
Farrer & Co solicitor Laura Minett navigates you through the vagaries of UK and European inheritance law
If you’ve amassed assets as your business has grown, at some point you’ll be advised to write a will. Farrer & Co solicitor Laura Minett navigates you through the complexity.
What are the key factors I need to consider when writing a will?
There are two principal aims: to plan for succession after your death and to minimise tax. A will is also an opportunity to look at options for lifetime planning and to ensure that your estate will be as easy as possible to administer after your death. As such, the will you put in place will be influenced by your stage of life, as well as your wishes. You will need to consider who is dependent on you for financial support. Whether you’re in a long-term relationship, married, engaged or getting divorced will also be relevant. Once decisions are made, you can look at how best your wishes can be met in a way that maximises tax efficiency.
Which assets can I pass on through a will?
Assets that are held jointly, often the family home, will pass outside of your will, along with any held in a family trust. Certain assets might attract tax relief, such as shares in the family business, and you may want to deal with these differently from the rest of your estate. If there are assets abroad, you may need to write separate wills for them.
You should also consider who you would trust to deal with your estate after your death, and then ask them if they would agree to being named as your executors. Many people choose a professional together with a close relative. If you have young children, serious thought should also be given to who you want as their guardian should both their parents die.
Can I avoid some inheritance tax by giving assets away during my lifetime?
Inheritance tax is a charge on lifetime gifts as well as death. However, provided you survive for seven years after passing on the gift (and, importantly, you do not continue to enjoy the asset), there will be no inheritance tax charge on it to an individual. Even if you survive for only three years, any inheritance tax bill may begin to reduce. Since 2006, it has been harder to gift assets into trusts without facing an inheritance tax charge. On the continent, many countries tax gifts. They often also operate ‘clawback’ rules that seek to ‘undo’ gifts made during an individual’s lifetime.
I own a house in France. I understand inheritance laws are different there (and on the continent in general). How might this affect my family’s inheritance?
France operates a system of forced heirship. This means up to three-quarters of your assets may be claimed by your children as of right, irrespective of your wishes (and what it says in your will). Most continental countries operate similar rules. For those based in the UK with a house in France, forced heirship will apply to the French property, but it may be possible to get round this with some basic planning.
Since British inheritance laws differ considerably from those in mainland Europe, will European Union (EU) plans on succession affect British law?
A proposed EU Regulation on Succession is intended to ensure that the law of only one EU country will apply to the whole of an individual’s estate. This will be the law of the country in which he or she is “habitually resident”, unless the law of nationality is chosen instead. So, continental rules of forced heirship might be applied to UK property, while clawback provisions may undo lifetime gifts of UK assets. Conversely, UK laws might be applied to continental assets, avoiding forced heirship. The UK will decide in January whether to opt into the regulation. Whether or not the UK participates, it’s almost certain to apply across the rest of the EU, which will mean that it must be taken into account if you have assets in EU countries.
How might my plans be affected by a change in government at the general election? If the Tories win, will my position be altered?
The Conservative party has announced that it will increase the nil rate band threshold (the value of your estate that you can pass on without paying inheritance tax) from £325,000 to £1m. That would mean many families would be lifted out of the inheritance tax net completely. In the pre-budget report, Labour announced that it would keep the £325,000 level until at least April 2011. The Tories also intend to maintain the transferable nil rate band introduced by Labour in 2008. This allows a surviving spouse to take advantage of any unused portion of their deceased spouse’s nil rate band as well as their own, in many cases doubling the value that can be passed on tax free. Under a Conservative government, it may be that up to £2m can be passed on in this way.