UK: It's A Family Affair: Generous Parents Left Open To IHT Risks

Manny Davidson, property tycoon and multimillionaire, is facing both a family feud and an IHT catastrophe. Eleanor Metcalf explains how to avoid inheritance tax disasters...

Generous father Manny Davidson, who also just happens to be a property tycoon and multimillionaire, handed over a generous portion of his estate to his children with the intention of passing on his wealth early, to save them paying inheritance tax (IHT) on the assets at this death.

However, family relations have soured and Mr Davidson is facing legal proceedings brought by his children over these very assets. This lead him to speak out against IHT planning and encourage parents to keep their assets for themselves.

In 1967, Mr Davidson set up a trust fund for his children which has reportedly grown to £600m. He also transferred his stately home, Lyegrove in Gloucestershire, into their names.

Following a family feud, the children have put Lyegrove on the market and are preventing Mr Davidson and his wife from visiting.

It is also alleged that legal proceedings have been commenced by the children to change the structure of the trust in order to deprive their parents of the ability to appoint new trustees.

Such actions highlight the problems that can be encountered when IHT planning.

IHT charges explained

Subject to any available exemptions and reliefs, IHT is charged at a rate of 40% on the value of assets at death to the extent that they exceed a deceased's available nilrate band (a maximum of £325,000).

Spouses and civil partners also have the opportunity to transfer their nil rate bands which can provide a maximum joint nilrate band of £650,000 on the second death. The prospect of a large IHT bill isincentive for many to carry out IHT planning during their lifetime and reduce the value of their estate.

The most obvious risk parents take when carrying out IHT planning is that their children will deal with the asset in a way that is contrary to their wishes.

As in the Manny Davidson case, the children can sell or give away the asset which, if it is a valuable heirloom or the family home, will be upsetting for their parents. The children can also mismanage the asset by not making sensible investment decisions, or by dissipating the money on holidays, fast cars and the good life.

Assets can also be claimed by third parties and pass outside the family in a way that was never intended; for example, if a child divorces, the assets may pass into the hands of their exspouse. Similar consequences can arise if a child is made bankrupt or dies before their parents.

Such pitfalls are not a reason not to tax plan but they demonstrate the need for parents to have safeguards in place to protect the assets they are passing on and to have a well thought through IHT planning strategy.

Safeguards and strategy

Parents (or anyone else) should be cautious about making outright gifts and exercise particular caution when gifting large assets or assets where there is sentimental attachment. This was the mistake Manny Davidson made when he gave Lyegrove outright to his children. This meant the children were free to deal with the asset as they wished; including selling the asset and using the cash for themselves.

To retain control, parents can consider using trusts or other structures to shelter the assets from IHT whilst also benefiting their children.

Subject to the value of the asset being gifted, a transfer of assets into trust can remove the value of the asset out of the parents' estates for IHT purposes (after they have survived the requisite seven year period).

The children (and others) can be the named as beneficiaries of the trust but the assets will be managed by the trustees, who could be, or could include, the parents.

Further control can be retained through the use of powers to appoint new trustees and the appointment of a "protector" (often used in offshore trusts). The trustees can also be given complete control over distribution decisions to the beneficiaries. This provides opportunities for trustees to protect the assets and the beneficiaries' financial interests should anyone fall off the rails or hit hard times.

A widely drawn trust can also provide planning opportunities for wealth to be passed down to later generations so as to benefit the family over the longer term.

There are alternatives to trusts that achieve a similar effect in terms of the balance between gift and control. Family Investment Companies being one example, where the parents can retain control over decisions via share rights.

As highlighted in the Davidson case, where there are disagreements between the trustees and beneficiaries, problems can still arise even with trusts or other protective structures in place.

Preventative steps can always be taken to guard against such issues arising or to make it difficult for beneficiaries to make such claims or take court proceedings.

Although nothing is guaranteed, clear notes from the parents setting out their intentions when creating the trust, good record keeping and good communication between the trustees and beneficiaries can go a long way to avoid complex and bitter disputes, and help to make sure the parents' wishes are respected.

Trusts and other structures

Gifting assets outright, into trust or into other structures, is not the only way to reduce your IHT bill. There are a number of exemptions and reliefs that you can use to protect your wealth through careful planning and investment.

A good IHT planning strategy will encompass a number of solutions that allow you to maximise the exemptions and allowances available. Above all, any strategy is not complete without an analysis of what assets you need to retain to maintain the lifestyle you want to lead plus extras.

You should never allow IHT planning to put you in a financially vulnerable position when things don't go according to plan.

With an IHT rate of 40% many families feel a need to carry out some tax planning. In the Summer Budget, it was announced that an additional nilrate band will be phased in from April 2017 where the family home is left to direct descendants, meaning that the combined nilrate band for spouses and civil partners, by April 2020, could be £1m.

This will reduce the IHT burden but for those with larger estates, a carefully considered IHT planning strategy with appropriate safeguards remains a good option – unless, as Manny Davidson muses (with hindsight), you want to just spend it.

Originally published in the Recruitment Planner on 27 July 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.