View more on these topics

Keep it in the family

Clients often ask you to advise them on tax and financial planning for their businesses. A key part of this is catering for their wishes to pass on their business – or the value representing it – if they die before retirement.

First, you need to ensure a plan is in place to satisfy this need. Second, you need to ensure this plan is as tax-efficient as possible.

For example, clients Alan, Brian and Colin have been shareholding directors in ABC Trading for the past two years. If Alan dies, what will happen to his shareholding?

Clearly, much depends on whether Alan has made a will. Let us assume he has left everything to his wife Danielle, who has never had the slightest interest in the affairs of the company. Thus, it seems unlikely that it will be in the best interests of the company for her to begin to have an interest in it. Besides, it is almost certainly not what the surviving directors would want.

What is the solution? The answer is a cross-option agreement. This creates an option for the survivors to buy the deceased’s shares and an option for the deceased’s executors to sell the shares to the survivors.

If either of the parties exercises their option, then the other party must comply with it. The effect is exactly as with the more straightforward buy-and-sell agreement. However, it preserves inheritance tax business property relief since no binding contract for sale existed on death.

However, on Danielle’s later death, her estate will suffer inheritance tax on the cash realised from selling Alan’s shares. Would it not therefore be better to advise Alan to complete a codicil to his will leaving his shares to a discretionary trust for the benefit of his wife and children? In this way, the cash will bypass Danielle’s estate and the value of Alan’s shares will finally pass to their children in a more inheritance tax-efficient manner.

Returning to the exercise of the options, how can the survivors ensure they can afford to exercise their option? They will need cash at the time that one of them dies. This is what life insurance does best. How should you write the policies? The most flexible solution would be for each of your clients to effect a policy on their own life and to make it subject to a suitable trust for their co-directors.

If one of the clients chooses to leave the company, the trust might allow the benefits of their policy to revert to them, should the remaining directors agree. If the trust allows this, does this create a liability under the new pre-owned assets tax? At the time of writing, it seems it does. However, the insurance industry has made very strong representations to the Inland Revenue that this should not be the case and is hopeful of an imminent positive change in this area. If no change is forthcoming, then advisers should reconsider this aspect of the trust.

Also, if the trust allows the benefits to revert to your client if they leave the company, does this not create a gift with reservation for inheritance tax purposes? If you can show that your clients have each effected policies under similar trusts as part of a commercial transaction at arm’s length, there can be no gift and, thus, there can be no gift with reservation. Therefore, they will have preserved the inheritance tax advantages normally associated with a trust.

Let us say that Alan has agreed to effect a policy on his own life in trust for the others. Provided they respond by effecting similar policies under similar trusts, including Alan as a beneficiary, this must be the basis for a commercial transaction at arm’s length. However, if Alan is paying a premium on his policy which is not equal to the benefit he could expect from the arrangement, can you describe this as a commercial transaction? No. It is essential to ensure the amount paid by each participant reflects their expectation of benefiting from the arrangement.

You can see there are significant business opportunities in share protection insurance. However, it is important to minimise inheritance tax not only on your client’s death but also on their spouse’s. It is this which is often overlooked.


Novelty value

With the end of the tax year approaching, some investors are looking at novel schemes which seem to offer big returns but are they worth the risk?


Isle of Man minister Bell dismisses Dublin threat

In an exclusive interview with Money Marketing, Bell says Dublin’s increasing presence as a tax-efficient centre opens up opportunities for joint ventures rather than threatening the Isle of Man’s economy.

Retirement fund - thumbnail

What price (more) freedoms?

George Osborne will make his last Budget speech of the current parliamentary term this week, and the early media briefings suggest that pensions will again feature heavily in that statement. So what are we able to learn from the weekend’s coverage?


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm