Private Wealth 2019 Comparisons

Last Updated August 13, 2019

Contributed By BDB Pitmans LLP

Law and Practice

Authors



BDB Pitmans LLP was formed by the 2018 merger of Bircham Dyson Bell and Pitmans, and offers clients a greater depth of services and expertise, advising both UK-based and international clients on multi-jurisdictional issues. The private wealth team offers a full range of services, including wealth structuring and estate planning, international succession, landed estates and agriculture, art and heritage property, immigration, international tax planning, tax compliance and philanthropy. The team is now part of a wider Individuals Department, comprising the residential property and family groups, which formally recognises the long-standing approach of working together to meet client needs. The team of 16 partners and 34 fee earners also works closely with the will and trust disputes team. We are extremely grateful for the contributions to this chapter made by Lorraine Jeffery, Geoff Kertesz, Judith Millar, Carolyn O’Sullivan and Simon Weil.

The UK has a sophisticated tax regime designed to capture the value in assets belonging to and transactions/activities undertaken by both individuals and entities. In terms of direct private taxes, the relevant ones are income tax on earned and unearned income and income gains, capital gains tax (CGT) on disposals generating chargeable gains, and inheritance tax (IHT) on some lifetime gifts and estates on death. The most relevant indirect private tax is stamp duty land tax (SDLT) on the purchase of real property in England and Wales.

The UK’s tax regime revolves round the situs of assets, the tax residence of individuals and entities, and the domicile of individuals. Domicile is a common law concept – essentially it is the place to which an individual has the most permanent connection, but it is always necessary to consider their domicile of origin and any domiciles of dependency and choice. Statute then adds an overlay of ‘deemed domicile’, whereby after broadly 15 years of residence in the UK an individual who is not actually domiciled in the UK is deemed to be domiciled for income tax, CGT and IHT purposes. Prior to an individual becoming deemed domiciled, they may opt for the remittance basis of taxation so that they are only taxed on foreign income and gains remitted or brought in to the UK and on UK income and gains. This attracts a remittance basis charge of GBP30,000 p.a after residence for seven out of the nine preceding years of tax assessment and GBP60,000 p.a. after residence for 12 out of the 14 preceding years of tax assessment.

Individuals therefore fall into four main categories:

  • UK resident and domiciled individuals whose income, capital gains and estate have a primary exposure to UK taxation subject to any double tax treaty relief and unilateral relief;
  • UK resident and deemed domiciled individuals whose position is parallel to the first category, albeit that it will be easier for them to shed their deemed domicile status than it is for the first category of individual to lose their domicile status;
  • individuals who are UK resident but not domiciled or deemed domiciled and who choose the remittance basis; only UK income and gains and remitted income and gains will be exposed to UK tax, and only UK situs assets will be exposed to IHT; and
  • individuals who are neither resident nor domiciled in the UK but have UK situs assets and who are potentially taxable on UK source income, gains on UK residential property and the value of UK situs assets on transfers/death.

For IHT, there is a lifetime allowance of GBP325,000 (which, once used, is available again after seven years), a small annual allowance (currently GBP3,000) and allowances for gifts on marriage and small gifts. Chargeable lifetime transfers (ie, transfers into trusts) are subject to lifetime rates at 20%. Gifts are treated as potentially exempt transfers that fall out of account if the donor survives seven years. Transfers to spouses and charities are exempt. There are special reliefs for agricultural property, business property and heritage property. There is also a relief for normal expenditure out of income.

The UK recognises trusts, and in taxing the trustees HMRC will look at the situs of the assets, the domicile status of the settlor and the residence of the trustees. Trusts vary from bare trusts (effectively nominee arrangements), through interest in possession trusts to fully discretionary trusts. Where there is a UK trust with UK trustees, the trustees pay income tax, CGT on actual and deemed disposals and IHT on certain chargeable events. The position of offshore trustees of foreign law trusts is very complex, with detailed anti-avoidance provisions. There can be deferrals of income tax and CGT, and IHT will be restricted to UK situs assets and to UK residential property held in trust structures.

UK tax legislation constantly evolves, and in the last decade or so there have been radical changes to the tax treatment of non-UK domiciled individuals, UK and foreign trusts and UK residential property, and large increases in the rates of SDLT. These changes are driven by concerns over tax leakage, a policy aim of treating long-term residents who are non-UK domiciled in the same way as their UK domiciled counterparts, and hostility to trusts. This leads to a more uncertain tax environment; for some clients this is unsettling, while others are more sanguine.

A notable trend has been the development of anti-abuse rules in the form of both a general anti-abuse rule (GAAR) and then targeted anti-abuse rules (TAARs) when draft legislation is introduced.

There has also been a trend towards increased transparency through the trusts register, which is presently a confidentially maintained register of certain express trusts, introduced in response to the EU Fourth Anti-Money Laundering Directive (MLD4). There are proposals to extend this to all trusts and continuing debate over access on a legitimate access basis (as recommended by the EU Fifth Anti-Money Laundering Directive (MLD5).

The increase in compliance and costs, and the loss of privacy is a concern for clients, but their tax and estate planning remains largely driven by family needs and asset protection aims in the way it always has been.

The UK has always been at the forefront of transparency initiatives. The domestic US legislation, FATCA, was reinforced by the US/UK Inter-Governmental Agreement, with filing from 31 May 2015. The UK implemented the OECD’s Common Reporting Standard with filing from 31 May 2017. It established a new corporate register of persons with significant control with effect from 6 April 2016, and adopted the Legal Entity Identifier for firms subject to the EU Markets in Financial Instruments Directive.

For the internationally mobile client, who may be affected by these initiatives in more than one jurisdiction, planning will need to take the domestic and global reporting requirements into account, and it may be an increasing influential strand in the years ahead.

The UK has three different jurisdictions (England and Wales; Scotland; and Northern Ireland), and the law that applies broadly depends on with which jurisdiction the individual is most closely connected. The jurisdictions have different succession regimes but, with the exception of Scotland to a limited extent, the basic principle is one of testamentary freedom.

An individual domiciled in England and Wales is free to leave their estate in the UK to whomever they choose upon their death. An exception is assets held jointly, which will generally pass to the surviving co-owner unless separate arrangements to the contrary are made. An individual is also free to make such lifetime gifts as they wish, which are only brought into account when the estate is divided in very limited circumstances.

In the absence of a will, the estate of an individual domiciled in England and Wales will pass in accordance with the intestacy rules, under which the estate will be divided between the surviving spouse/civil partner and descendants. The wider family will inherit in the absence of a spouse/civil partner and descendants, and in the absence of wider family the estate will pass to the state.

Complete testamentary freedom could leave family members inadequately provided for so, where the deceased was domiciled in England and Wales at the time of death, the Inheritance (Provision for Family and Dependants) Act 1975 (IPFDA 1975) gives a mechanism for disappointed family members and dependants to make a claim against the estate if they consider that the deceased’s estate does not provide adequately for them.

If an individual is not domiciled in a part of the UK under general law, then the law of their country of domicile will apply to their movable assets in the UK, which can bring foreign cultural considerations such as forced heirship or Shar’ia law into play.

Families and business are increasingly international. It is not uncommon to find people moving between countries for work, marrying people from different backgrounds or acquiring assets in a number of countries. It is therefore vital to have a detailed understanding of a family, its circumstances and assets, and to work closely with advisers in other jurisdictions.

Succession law in the UK is a scissionary system. The law that applies to movable assets is dependent on the domicile of the deceased but for immovable assets it is the law of the country where the asset is located.

Whilst the UK takes domicile as its starting point for succession law, other countries may apply different concepts, such as nationality or habitual residence, and even those countries that use the term domicile in succession matters may have a different understanding of the term. With the exception of the EU Succession Regulation (to which the UK is not a party), there are no international treaties designed to resolve conflicts between the laws that apply in different jurisdictions, and the client and his advisers are left to navigate their way through as best they can, taking into account their practical experience and the family’s circumstances. These difficulties can lead to high-profile disputes and for the averagely wealthy the best advice may be for those in advancing years to simplify their assets and their location so far as is possible.

The UK has entered into double taxation agreements that apply to inheritance and estate taxes with only ten countries. Where there is no estate tax agreement, it may be possible to claim unilateral relief against UK tax for tax paid abroad.

England and Wales does not have forced heirship laws, although they may apply to movable assets in the jurisdiction where the deceased was domiciled in a country that has forced heirship laws.

There are limited forced heirship laws for those domiciled in Scotland, under which a surviving spouse/civil partner and children can claim the value of a share in the deceased’s net movable estate, as a debt of the estate. These rights effectively operate to ensure the protection of the family and to give a fixed entitlement in contrast to the discretionary position in England and Wales under the IPFDA 1975.

England and Wales does not have a matrimonial property regime. The regime is effectively one of ‘separation of assets’ and there is no concept of community of property. Assets may be held by a couple in their individual names or jointly. Jointly held assets may be held as joint tenants (ie, they pass to the surviving co-owner by right of survivorship) or as tenants in common (ie, each co-owner has a distinct share, which will pass as under his will/the intestacy rules).

England and Wales does not recognise pre-nuptial and post-nuptial agreements as legally binding. However, a properly drawn-up agreement will be taken into account by the court when considering how the assets and income should be distributed following the breakdown of a marriage. Greater weight will be given to agreements where both parties are legally represented, where there has been full disclosure of assets, and where the agreement meets the parties’ needs and has been entered into a reasonable time before the marriage.

By contrast, Scotland draws a distinction between assets owned before a marriage or gifted/inherited during the marriage and matrimonial property, and pre-nuptial and post-nuptial agreements can be used to ring-fence pre-marital and gifted/inherited assets.

In general, a lifetime gift is treated as a disposal by the donor of the asset at its market value on the date of the gift, and the normal CGT rules apply, with the gain or loss being taxed accordingly. The donee will acquire the asset at its market value on the date of the gift.

There are some exceptions. Lifetime transfers between spouses/civil partners take place on a no gain/no loss basis, with the donee acquiring the asset at the donor’s base cost. In some circumstances, such as transfers into trust or transfers of assets that qualify for relief from IHT, any gain can be ‘held over’ and the donee will acquire the asset at the donor’s base cost.

On death, all assets in the estate are revalued for CGT purposes and the beneficiary will acquire the asset at its value on the date of death.

Historically, trusts were the preferred vehicle for transferring assets to younger generations. The transfer could be achieved free of IHT if assets were transferred into a suitable trust for the donor’s children or grandchildren and the donor survived seven years from the date of the gift. The Finance Act 2006 made sweeping changes to the IHT regime for trusts, and it is now almost impossible to make lifetime transfers into trust without triggering an immediate charge to IHT. In practice, no tax may be payable on the transfer if it qualifies for agricultural or business property relief, is exempt as normal expenditure out of income or is below the tax threshold, but the scope for using trusts as a means of transferring assets to younger generations tax-free has been severely limited.

As a result, clients and their advisers have starting exploring other options. One which is currently favoured is the family investment company (FIC), which is a private company whose shareholders are family members. Typically, parents or grandparents will set up and manage the company. They will also provide the funds to the FIC by way of loan or by subscribing for shares. Different share classes enable shares in the FIC to be passed to the younger generations by way of outright gift (which will be exempt from IHT if the donor survives by seven years) whilst control of the FIC remains with the parents/grandparents.

The first question to consider is what terms and conditions were agreed when the account was set up. Many accounts are personal to the person who created them, and the provider will not allow access to anyone else.

Under the law of England and Wales, if the deceased’s rights under the contract with the provider survive death then they will pass to the personal representatives (PRs) as part of the estate. However, there is not yet any specific statutory provision that gives the PRs the right to deal with those assets, so it is helpful (particularly where those assets or their provider are outside the UK) to include express wording in the will that allows the PRs to access and deal with digital assets.

The use of trusts stretches back over centuries in England, and they have evolved into sophisticated arrangements that confer privacy, allow wealth to be transmitted efficiently across generations and, where relevant, provide a mechanism for the protection of minors and vulnerable beneficiaries.

More recently, trusts have come to be used increasingly in a tax planning context but significant changes in their tax treatment in 2006 have meant that they are no longer as advantageous from a tax perspective. The focus is therefore tending to shift back to the use of trusts for succession purposes as a means of providing for the family but in a more tax-neutral way. This change in emphasis has resulted in the creation of far fewer lifetime trusts.

The main types of trust arising during the settlor’s lifetime or on death include:

  • life interest or interest in possession (the income passing to one or more beneficiaries, with capital held for others);
  • discretionary (giving the trustees wide discretionary powers over the distribution of income and capital); and
  • bare trusts (with assets held by the trustees on behalf of a beneficiary who has an absolute right to the income and capital once they reach 18).

Some trusts within these broad categories still benefit from favourable tax treatment, including disabled person’s trusts, bereaved minor’s trusts, age 18-to-25 trusts, and trusts creating an immediate post-death interest.

Taking a different approach to succession planning, a family investment company may offer a family the opportunity to pass assets on to younger generations in a tailored, controlled and tax-efficient manner (see 2.6 Transfer of Assets: Vehicles and Planning Mechanisms, above).

Trusts were invented by the English Courts, and the current law of trusts is derived from judicial decisions in reported cases, but the common law has been supplemented by a substantial body of legislation that continues to develop to keep pace with the modern world in which trusts operate.

For UK tax purposes, the residence status of a trust determines how the settlor, the trustees and the beneficiaries are taxed to income tax and CGT. The IHT position is governed by the situs of the assets and the domicile status of the settlor when he put the assets into the trust. If the trust is resident outside the UK, it is generally referred to as an ‘offshore trust’ and, in this context, the citizenship of a fiduciary or beneficiary is not relevant.

An offshore trust is one where either none of the trustees is resident in the UK, or there is a mixture of resident and non-resident trustees and, at the relevant time, the settlor was neither resident, domiciled nor deemed domiciled in the UK. This means that, in certain circumstances, a UK resident individual may serve as a trustee of an offshore trust without compromising its offshore status. 

The rules applying to the taxation of income and gains derived from assets held by an offshore trust are complex. Non-UK resident trustees generally do not pay income tax and CGT on trust income and gains as they arise but there may be a charge, instead, on the settlor or the beneficiaries (depending on residence and domicile status and where the benefit is received).

It is possible to effect changes to English law trusts in a number of ways:

  • the trust deed may give the trustees an express power to vary some or all of its provisions;
  • powers of advancement and appointment can be exercised in order to bring about substantial alterations; and
  • trustees and/or beneficiaries can apply to the Court for an order to vary the trust.

It is possible for a settlor under English law to exert a degree of control over the management and ultimate destination of the assets after they have been settled. In the context of UK resident trusts, the usual way of doing so is for the settlor to be appointed as one of the trustees, which has no adverse tax consequences as long as the settlor/trustee is not also a beneficiary. Whether or not appointed a trustee, it is also common for the settlor to reserve the power to appoint new trustees. Against this background it is more unusual for the settlor of a UK resident trust to reserve the range of powers that might be considered in relation to an offshore trust, and there are no specific statutory provisions under English law that enable a settlor to do so. An English law trust in which the settlor has reserved very extensive powers might also be open to challenge on the basis that control of trust property has not genuinely passed from the settlor to the trustees and that the trust is a mere nominee arrangement. This may have serious adverse tax consequences.

The trust has been used for generations in England as a vehicle to preserve and protect assets.

The principal benefit of a trust is the separation of legal ownership from beneficial interest. The legal ownership is held by trustees, who hold the assets for the benefit of a defined class of potential beneficiaries, who would typically comprise members of the settlor’s family. For tax reasons, the settlor would normally be excluded from any benefit from the trust. In a modern trust, the trustees would typically be given complete discretion over how to use the assets of the trust for the benefit of the beneficiaries.

In the context of a family business, this means that if the business owner were to place part, or all, of his shareholding into trust, those shares would be registered in the names of trustees, who would hold the voting rights. The settlor could be a trustee, in order to retain a degree of control over the company, although any decisions taken by the trustees must be taken in the best interests of the beneficiaries.

Owning a business through a trust enables a wide class of family beneficiaries to benefit, without fragmenting shareholdings. The trustees, as shareholders, can ensure that the business is managed on a successful long-term basis. The trustees can ultimately determine the dividend policy of the business through the appointment of directors and thus control how funds from the business are used for the benefit of the owning family.

The trustees would not necessarily have to be involved in the day-to-day running of the business; they can instead appoint professional managers, or family members, to run it. The trust deed would normally provide the trustees with all necessary powers to enable them to hold the shares and join in any shareholders agreement, and protections for them in the event of difficulties arising in the business.

A trust can last for up to 125 years and the beneficiaries can include as yet unborn family members, so a carefully crafted structure can protect a family business for many generations.

Businesses that survive for more than three generations in family ownership are rare, for good reasons. Value may be lost to punitive taxation on generational change, or the next generation of owners may not share the founder’s talent, leaving the business to fail, or may simply not be interested in the business, and choose to sell it.

The key to successful succession planning is to protect the business from undue taxation and engage the next generation, without giving them unrestricted control over it.

England currently has a relatively benign tax regime for trading businesses. If the ownership is structured correctly, the business is effectively free of IHT, whether held in outright ownership or in trust. It is important, however, to keep the nature of the business and the ownership structure under review, to ensure the strict conditions for relief continue to be met.

At some point, however, the owner will need to give up ownership, whether in his lifetime or on death. If he wants to restrict the ability of the next generation to deal with the shares, the simplest option is to include restrictions in the company’s constitution on the shareholders’ ability to deal with the shares. Examples might be that shares cannot be transferred outside the family, or pre-emption rights giving other family members, or the company itself, the option to buy back the shares. An alternative approach could be to create different share classes, retaining shares with voting rights, and giving shares holding the value of the company, or a right to dividends, away to the next generation.

A shareholders’ agreement could impose further restrictions on the next generation’s ability to deal with the business, or set out circumstances in which the business could be disposed of. Such an agreement would require the co-operation of all shareholders, but could be of considerable value if a generation of shareholders is in agreement on how to transfer the business to the next generation. They could put an agreement in place between themselves and then only pass shares on to their children if they agreed to join in the terms of the shareholders’ agreement.

A trust, as set out above, can be an ideal vehicle for succession planning. It takes value out of the settlor’s estate, but retains control in the hands of the trustees, who can decide how and when to pass the shares outright to beneficiaries. It is a particularly useful mechanism for bypassing generations and setting aside shares for minors and as yet unborn family members. Trustees can join in a shareholders agreement to provide further control.

All of these approaches can limit the ability of family members to damage the business if there is a dispute, but the best approach is to prevent a dispute arising. The best way to protect the business is to keep the family together. Communication is key. There should be frank discussions about what is expected of family members: will they work in the business, or will it be run by outside managers; when and how can individual family members sell out; what is the policy on payment of dividends to those family members who do not work in the business? All of these can be set out in a family constitution.

If a transfer of only a partial interest in a business or company is made, it is usually possible to agree with HMRC a value less than the pro-rata proportion of the total value of the business. The discount that will be applied will depend on a number of factors, such as the size of the shareholding, whether it is a minority interest, the rights attached to the shares and dividend history. The smaller the shareholding, the greater the discount that can usually be agreed.

It is important to note, however, that if a lifetime gift is made of a partial interest, with the donor retaining the balance of the shares, the value transferred for IHT purposes is the loss in value of the donor’s estate. Thus, the value transferred for tax purposes may be greater than the value of the shares received by the recipient.

There are a number of trends potentially driving disputes.

Only 45% of adults in 2018 have a will, which is a slight increase from 39% in 2017. This means that more than half of the adult population of the UK is at risk of dying intestate as they do not have a will. If thought is not given by the testator as to how his estate will be divided on death, it can give rise to disputes.

Family structures are growing increasingly complex. Although divorce rates are at their lowest since 1973 (8.4% for opposite-sex marriages in 2017 according to the Office for National Statistics), fewer people are getting married and are choosing instead to cohabit. If the “no fault” divorce system is introduced, this may result in an increase in divorce rates and, in turn, an increase in more complex family structures.

People are living longer, with scope for second or third marriages, and heirs are having to wait longer for their inheritance. Connected to this is the increased risk of mental capacity issues arising, financial abuse and fraud, which can then give rise to applications to the court to challenge the validity of a will because a testator lacked testamentary capacity, did not know or approve of the contents of the will or failed to execute the document correctly. Similarly, claims for undue influence and forgery could be brought.

Regardless of whether or not there is a will, a claim can be brought under the Inheritance (Provision for Family and Dependants) Act 1975 by an aggrieved spouse, a child (including adult children), dependants and cohabitees for reasonable financial provision from the deceased’s estate. The more complex the family structure, the more difficult it is to satisfy everyone as there is just one pot of money, particularly as the pot increasingly tends to consist of one principal asset: the family home.

The Law Commission is yet to report on its 2017 will consultation. They consulted on various proposals but the one that could have the biggest impact on disputes in this field is whether the courts should be able to dispense with the formalities for a will where it is clear what the deceased wanted. If the long-standing and clear rules are changed, there is wide potential for abuse (such as fraudulently claiming the existence of testamentary intentions) and further disputes (such as whether a text message can constitute a will if another person has access to your phone PIN, whether the person who sent the text had been intoxicated at the time the message was sent or saved in draft, whether a draft message or note in one’s phone is sufficient, the meaning of the words used, and so on).

Unfortunately, having a will does not prevent financial abuse during a person’s lifetime. Age UK conservatively estimates that 1-2% of people aged 65 or over in the UK today have suffered financial abuse since turning 65, which is roughly 130,000 people. This can result in applications to the Court of Protection during the person’s lifetime to remove an attorney, to prevent a power of attorney from being registered, to seek the return of money taken, and so on. It can also result in an investigation into the lifetime transfers after death, with a view to undoing them.

Trust disputes are likely to increase since the introduction of GDPR, as non-beneficiaries of a trust such as a divorcing spouse or creditor now have a means of getting access to confidential trust information. Trustees and settlors are having to rethink the way they structure settlements, how they deal with information and the jurisdictions they use.

Since the 2008 UK recession, beneficiaries appear to be paying closer attention to the decisions of trustees, particularly in relation to investments. Where a trust is failing or insolvent, the beneficiaries will look to the trustees for compensation (restitution). Beneficiaries appear to be more willing to change trustees than before, and will bring hostile litigation to do so if necessary. With the increase in litigation in this area, trustees are quicker to seek the approval of the court in relation to a decision they consider will be met with hostility by beneficiaries.

Variation of trusts under the Variation of Trusts Act 1958 continue to occur frequently. This procedure allows for an older trust to modernise and revamp its terms. It remains to be seen whether variations for a purely fiscal purpose will one day be curtailed.

The mechanism for compensation depends greatly on the claim brought. English courts have a powerful, inherent, equitable jurisdiction over trusts and estates.

If a will is found to be invalid, the previous will stands or, if there is no previous will, the estate is administered under the rules of intestacy. If it is found that gifts were made during a person’s lifetime when they did not have capacity to make them, the court may order that these gifts are repaid in full or traced into the asset purchased with the gift. For proprietary estoppel claims (saying that X made a promise to Y on which Y has relied and acted to his detriment), the remedy may be fulfilling the promise made in full or in part. For a claim for reasonable financial provision, the court has wide-reaching powers, including imposing a lump sum order or the variation of a trust to ring-fence a portion of a trust for the claimant.

If a trustee causes a loss to a trust, the court may order the trustee to restore the trust fund to the position it would have been in if the breach had not occurred.

Unlike trusts based in international finance centres, corporate fiduciaries are not as prevalent in the UK. Individual trustees are often found in express and statutory trusts in the UK, and will usually be drawn from professional advisers, family members and family friends. There is, however, a higher duty of care expected from corporate and professional fiduciaries, and this is enshrined in legislation.

Trusts may also arise through land ownership in England and Wales, so there are a large number of trusts of land with individual trustee owners.

A concept which is found in the UK (and not elsewhere) is that of the trust corporation. A company will qualify as a trust corporation if it is incorporated in the UK or the EU, is authorised to undertake trust business, has a place of business in the UK, and has share capital of at least GBP250,000, with GBP100,000 being paid up. Care has to be taken not to assume that every corporate trustee is a trust corporation, as trust legislation in the UK is based on a distinction between the two.

A trust in the UK has no separate identity and it is the trustees acting as a body who are subject to personal liability. Consequently, they need to ensure that there are sufficient protections in the terms of the trust (eg, appropriate exoneration clauses depending on their standard of expertise), that they take steps to limit their liability when contracting with third parties, and that they consider bolstering their right to be reimbursed for properly incurred expenditure by preserving their equitable lien and possibly taking an express indemnity when distributing assets to beneficiaries. The trustee should also ensure that the powers conferred on the trustees expressly by the trust will, when coupled with the statutory powers, enable them to deal with the assets of the trust.

See 6.4 Fiduciary Investment below.

The quite narrow approach to trustee investment allowed by the Trustee Investment Act 1961 was modernised in the wake of the deregulation of the City in the 1980s/1990s by the Trustee Act 2000. This allows trustees to invest as if they are absolute owners but also provided that they must have regard to standard investment criteria when exercising their powers of investment and reviewing their investments to see if any should be varied. The standard investment criteria are the suitability of the proposed investment for the trust and the need to diversify so far as is appropriate. The trustees should take advice as appropriate and are permitted to delegate their investment function, provided they give (and review) their guidance in an investment policy statement. The position of the trustees in relation to investment is set in their overarching duty to have regard to the needs of the beneficiaries and to their duty to avoid conflict between their position as trustees and their personal position.

The definition of the standard investment criteria is closely modelled on modern portfolio theory but the power is also subject to the duty of care (see above), so other aspects may need to be considered too.

Diversification should be considered in order to avoid risk, but often the trust fund will comprise assets that a settlor has settled with the deliberate aspiration of retention and preservation for a family over generations. The asset may be an estate, a family business or a valuable collection of art or other chattels. It is incumbent on the trustees to keep such assets under review and, where there is an active business, even if their duty to intervene is restricted, they should intervene if they become aware of a problem and therefore need to have a sufficient information flow to see if there are problems.

Domicile

Domicile is a key concept in common law jurisdictions and international conflict of laws in resolving which system of law should be applied to an individual where an individual has connections with more than one jurisdiction and questions arise as to personal law matters such as marriage, succession and taxation. Domicile is based upon the idea of a permanent home in a particular territory, but is tempered by principles that can mean an individual has never lived in such territory.‎ An individual can only have one domicile at any point in time.

An individual starts life with a domicile of origin based upon the domicile of their father (or their mother if their parents are not married). This can change up to the age of 16 to a domicile of dependence if the relevant parent changes domicile, and thereafter can change through an individual's own choice by residence and intention to stay in a new territory habitually. Ceasing residence in a domicile of choice with no intention to return will result either in a resumption of a domicile of origin if there is no fixed intent to stay in the next country of residence, or a new domicile of choice. Proving a change of domicile can be difficult, requiring reference to a myriad of facts and evidenced intentions regarding an individual.

Within UK tax legislation,‎ domicile has long been one determining factor in how an individual is taxed. In recent years, UK tax law has extended the concept of deemed domicile from applying only to IHT to a general application to direct taxes, so that an individual will be treated as UK tax domiciled after living for 15 out of 20 tax years in the UK whilst for personal law purposes (for example, succession) still having their actual domicile elsewhere. In UK tax terms, it is also difficult to shed domicile instantly and an individual leaving the UK can still be caught in the tax net as they are deemed domiciled for up to three years after leaving and changing domicile.

Residency

In the UK, as in many other countries (but notably not the USA), residence is a significant determinant in relation to the liability for payment of taxes and has been the subject of statutory redefinition in the last few years.

Under the ‎statutory residence test, an individual will automatically be UK resident if they spend more than 183 days in a tax year in the UK but could be resident if they have a home in the UK for a consecutive period of at least 91 days and there are at least 30 separate days when the individual is present in the UK home and either has no overseas home or one or more homes overseas and in the tax year there were fewer than 30 separate days when they are present in any overseas home.

An individual will automatically not be UK resident if they spend fewer than 16 days in the UK in any tax year, if they spend fewer than 46 days in a tax year having been UK resident in any of the preceding three tax years, or if they work sufficient hours overseas and actually spend fewer than 91 days in the UK and there are no more than 31 days when they do three hours or more of work in the UK.

For many individuals, however, these automatic rules do not apply, and their residency depends upon the number of ties they have where they spend between 46, 92, 121 and 183 days per year. The connecting factors include the following:

  • a family tie through the presence of a spouse, civil partner and/or minor children;
  • an accommodation tie;
  • a 90-day tie through having previously spent more than 90 days in the UK in either of the two preceding tax years;
  • a country tie if they were previously resident any of the three preceding tax years and spend more days in the UK than any other country; and
  • a work tie.

An individual becoming resident needs four connecting factors if they are only spending up to 45 days but just two if they are spending more than 121. An individual who is leaving the UK needs to reduce their connecting factors and days spent. It is perfectly possible to be tax resident in more than one country in any particular tax year, and regard should always be had to any available double tax treaties in determining tax status.

Citizenship

British citizenship takes a number of different forms, reflecting the history of the UK and its relationship with Crown dependencies, territories and former colonies.

Full British citizenship gives a right of abode in the UK and the ability to come and go without time restriction. Citizenship can be acquired by a number of routes, including birth in the UK before 1983, birth in the UK after 1983 to a British parent or settled parents, descent (over one generation) from a UK-born British parent where born abroad, registration or naturalisation. Naturalisation is usually on the basis of five years' residence in the UK where at least one year is with indefinite leave to remain (or three years if married to a British citizen), knowledge of the English language and life in the UK, with an intention to have the principal home in the UK.‎ As most paths to settlement in the UK require five years' residence first, this usually means a six-year residency before citizenship.

The UK does not run a citizenship ‎by investment programme. Citizenship by naturalisation is, as noted above, usually available after residence in the UK for a period of at least five years, one of which is with indefinite leave. As an exception to the general rule about obtaining indefinite leave after five years' residence in a qualifying category, the UK Investor programme – which offers a path to settlement for those investing more than GBP2 million in in the UK by way of UK share capital or loan capital in active and trading UK registered companies – has specific provisions to reduce the period before an application for indefinite leave can be made by investors who invest more that GBP5 million and GBP10 million, to three years and two years respectively.

As noted in 3.1 Types of Trusts, Foundations or Similar Entities, 3.2 Recognition of Trusts and3.3 Tax Considerations: Fiduciary or Beneficiary Designation above, the particular features of the trust that make it suitable for use as a safeguarding tool for vulnerable persons include the flexibility available in terms of form and the vesting of assets in trustees who can look to the interests of beneficiaries who may be or may become incapable.

Whilst a discretionary trust may remain the most flexible form of trust, tax considerations are an important part of any planning as it can be difficult to achieve tax efficiently where there are no available reliefs. Specific tax rules apply to trusts for disabled persons, which have the advantage to the donor of not giving rise to immediate lifetime IHT issues whilst the disabled beneficiary is treated as a life tenant of funds without having an automatic entitlement to the income and with access to state benefits maintained. For trusts created on death, the availability of particular tax treatments to bereaved minors and age 18-to-25 trusts provides variant trust structures for safeguarding minors alongside the other main trust structures referred to above. Each can be used in appropriate circumstances to protect vulnerable persons. Those planning to benefit those with disabilities always need to take specific account of the rules regarding the availability of state benefits, which may be withdrawn where a beneficiary has entitlements to capital or income above stated levels.

The appointment of guardians for minor children can be effected by parents or by existing guardians, by the will of a parent or by a separate written instrument. Otherwise, the Court holds power to appoint a guardian for a minor child and to intervene.

In the UK there has been a regime for powers of attorney that will survive or take effect upon a donor’s incapacity since 1985, initially through enduring powers of attorney and since 2007 by ‎making lasting powers of attorney (LPAs). Today, individuals can make LPAs to cover, separately, property and financial affairs and health and welfare issues. These enable an individual to appoint one or more persons to act as attorney and to take decisions on behalf of the individual following incapacity. Use of such powers enables an individual to appoint the attorney‎s he or she trusts, and to avoid the costs and expenses that would otherwise ensue on an application being required to be made to Court if incapacity occurs and such powers do not exist. Attorneys are required to act in the best interests of the donor and the powers must be registered with the Court of Protection.

The Court has power to appoint a deputy for a person who lacks capacity, either for property and financial affairs or for health and welfare issues.

People often make gifts in their wills and by way of trusts to their children. Some of these gifts will refer to the beneficiary by name; others will more commonly refer to the class of beneficiaries as “my children”. Historically, referring to a class of beneficiaries as “my children” was regarded as relatively straightforward; however, as more non-traditional families have emerged, the definition of the “child” in wills and such legal documents has assumed greater legal complexity.

It remains the prerogative of the testator or settlor to choose whether to define the term “children” in their will in order to avoid any confusion about who should be included within that class. For example, a testator could define “children” to include their step-children, despite there being no biological nexus. Increasingly, society has been broadening the “child” category and the law has been attempting to catch up – hence the danger of assuming that the term “children” will reflect the personal interpretation of that expression on the part of the would-be testator or settlor. Without a clear definition, the law may dictate an outcome that was never intended by the latter.

The traditionalist family model – ie, husband and wife who produce children after marriage – is now one amongst several others, resulting from changes in societal values and advances in science and technology. More children are being born out of wedlock and there has been a rise in second marriages, leading to an increase in step-children. Such family units are often referred to as the blended family. Even more radically, there has been a rise in same-sex parenting and surrogacy in many different shapes and forms.

In the UK, illegitimate children are now treated by law as the legitimate children of their biological parents. As such, any references to “children” in a person’s will made on or after 4 April 1988 will include both children of the traditional family unit and those born out of wedlock. Also, the definition of “children” in the intestacy rules includes legitimate and illegitimate children.

Before the advent of in vitro fertilisation, the most common means by which same-sex couples sought to have children was adoption. Adopted children are considered to be the legitimate children of the adopters from the date of the adoption. Any references to “children” in a will or settlement are therefore deemed to include the testator’s or settlor’s adopted children.

In vitro methods and surrogacy have probably done more than anything else to challenge the law in the context of non-traditional families. Trends in artificial reproductive technology have made elective single parenting possible, as well as extending the options for same-sex couples.

These advances now permit the banking of reproductive material, making even posthumous reproduction possible. Legislation is now in place to control posthumous reproduction from genetic material, inheritance by individuals reproduced posthumously from genetic material, and posthumous paternity and maternity testing.

Same-sex couples can enter into civil partnerships in the UK. England, Wales and Scotland each provide for same-sex marriages. Civil partners and same-sex married couples are essentially able to enjoy the same rights, and owe the same responsibilities for tax and other purposes as those inherent in a civil marriage.

The UK does not recognise domestic partners. Without a will in place to make appropriate provision for a cohabiting partner, an application may need to be made to the court under the Inheritance (Provision for Family and Dependants) Act 1975.

The UK has implemented various tax incentives to encourage individuals to give to charity.

There is an IHT exemption for donations made to a UK registered charity during the donor’s lifetime or on death. On lifetime gifts, any gains arising on the disposal created by the gift are also exempt from CGT.

Gift Aid is an income tax relief for cash gifts, and allows charities to reclaim the basic rate of income tax on any personal donation from a UK taxpayer. Therefore, if a charity receives a cash gift of GBP100 under Gift Aid, it can reclaim 25% from HMRC and ultimately receive a gross donation of GBP125. Gift Aid is beneficial to higher and additional rate taxpayers because they can reclaim from HMRC the difference between the basic rate of tax claimed by the charity on their donation and the higher rate of tax they actually paid – ie, higher and additional rate taxpayers are respectively able to claim 20% and 25% of their gross donation. However, there must also be sufficient income and realised capital gains in the hands of the donor to warrant the Gift Aid claim.

Income tax relief is available for gifts of quoted securities or land made to a charity. It allows the donor to deduct its market value on the date of the gift from their total taxable income in the year in which the gift was made.

When an individual leaves 10% of their net estate to charity, the rate of IHT on a deceased’s estate is reduced from 40% to 36%. This relief applies to the estates of those who died on or after 6 April 2012.

The Acceptance in Lieu scheme allows the executors of an estate to transfer culturally or historically important objects, land and buildings within the deceased’s estate to a museum or gallery in full or part payment of the estate’s IHT liability. If the value of the object or objects exceeds the IHT charge involved, the transfer is termed “hybrid” and will entail a payment to the estate on advantageous terms.

The recently introduced Cultural Gift Scheme allows individuals or companies to offer pre-eminent objects as gifts to the nation. An expert panel is required to determine whether the object is eligible to qualify as a donation under the scheme. If eligible, the donor of the gift can reduce their liability to income tax, CGT or corporation tax by 30% if an individual or 20% if a company.

The trust instrument charity (TIC) is the generally favoured vehicle for an exclusively grant-giving foundation, the risks associated with which are minimal. The charity trustees are jointly and severally liable to third parties and comprise the sole legal personalities.

For service provider and/or fundraising charities (subject to greater third party risks), the typical vehicles are a company limited by guarantee (CLG) or a charitable incorporated organisation (CIO). The directors of a CLG are also charity trustees, and the board of a CIO comprises trustees, but liability to third parties attaches in each case to the corporate body that has limited liability.

The TIC is probably the most straightforward and economical entity to administer, but the trustees must be sure to avoid liabilities that exceed the value of the trust fund. TICs are also only subject to one regulator: the Charity Commission.

By contrast, the CLG is regulated by both the Charity Commission and Companies House; the CIO shares the advantages of a single Charity Commission regulator with the TIC but it only assumes a legal personality on registration with the Commission. The CLG becomes a charity on registration with Companies House, which is a much faster process than registration with the Commission, the second stage for a CLG that confirms its charitable status.

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BDB Pitmans LLP was formed by the 2018 merger of Bircham Dyson Bell and Pitmans, and offers clients a greater depth of services and expertise, advising both UK-based and international clients on multi-jurisdictional issues. The private wealth team offers a full range of services, including wealth structuring and estate planning, international succession, landed estates and agriculture, art and heritage property, immigration, international tax planning, tax compliance and philanthropy. The team is now part of a wider Individuals Department, comprising the residential property and family groups, which formally recognises the long-standing approach of working together to meet client needs. The team of 16 partners and 34 fee earners also works closely with the will and trust disputes team. We are extremely grateful for the contributions to this chapter made by Lorraine Jeffery, Geoff Kertesz, Judith Millar, Carolyn O’Sullivan and Simon Weil.

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