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. The relevant direct private taxes 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. In addition, statute has introduced the concept of “deemed domicile” (see 7.1 Requirements for Domicile, Residency and Citizenship).

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 into the UK and on UK income and gains. This attracts a remittance basis charge of GBP30,000 per annum after residence for seven out of the nine preceding years of tax assessment and GBP60,000 per annum after residence for twelve out of the fourteen preceding years of tax assessment.

Individuals therefore fall into four main categories:

• UK resident and domiciled individuals whose income, capital gains and estates 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;
• UK resident but not domiciled or deemed domiciled individuals 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.

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.

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, with IHT restricted to UK situs assets and to UK residential property held in offshore companies and trust structures.

For IHT, there is nil rate band (NRB) of GBP325,000 which, once used, is available again after seven years, and on death to the extent unused. Also available are a small annual allowance (GBP3,000) plus allowances for gifts on marriage and small gifts.

Gifts are treated as potentially exempt transfers that fall out of account if the donor survives seven years. Transfers to most spouses and charities are exempt. There are special reliefs for agricultural property, business property, heritage property and regular expenditure out of income. Chargeable lifetime transfers (ie transfers into trusts) are subject to the lifetime tax rate of 20%.

On death, in addition to the NRB there is a residential property nil-rate band which, subject to certain criteria, provides a further allowance up to GBP175,000. Unused allowances on death are transferable to spouses and civil partners. The main tax rate for IHT on death is 40%.

On death, estates benefit from an uplift to market value for most assets for CGT purposes.

There are reliefs for business owners – business asset disposal relief provides a lower rate of CGT on qualifying chargeable gains.

Income tax and CGT reliefs for investors in venture capital trust schemes, enterprise investment schemes and seed enterprise investment schemes are also available.

Considerable legislative effort has been made in the last decade to bring non-UK residents’ ownership of real estate in line with that of UK residents (a policy aim) and in some respects on a more unfavourable basis (to dampen foreign investment into the property market).

Since 1 April 2021, on acquisition of residential property, non-resident individuals are subject to a 2% surcharge for SDLT whilst for offshore companies the rate is 17%. The Annual Tax on Enveloped Dwellings (ATED) has applied since 1 April 2013 to ownership through an offshore company.

Detailed CGT provisions apply to non-resident individuals, trusts and companies on direct disposals of residential property and on disposals of substantial investments in property-rich companies. CGT property returns must be filed and tax payments made by individuals and trusts within 60 days. Non-resident companies need to register for corporation tax if they are not already within its scope.

The availability of principal private residence relief for a non-resident individual is very restricted. There is also a TAAR (Targeted Anti-Avoidance Rule) in relation to indirect disposals to dissuade the use of arrangements which are specifically designed to produce a tax advantage.

The flatness of the property market in recent years, coupled with the ability to make a rebasing election, has meant that the effect of the disposal provisions has so far been somewhat tempered.

UK tax legislation constantly evolves. In recent years 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 a policy aim of treating non-UK domiciled long-term residents in the same way as their UK domiciled counterparts, and hostility to trusts.

Heavy government borrowing coupled with inflation has brought into sharp focus the debate between stimulating the economy through tax breaks in the hope of generating growth and a more risk averse policy of freezing tax allowances and raising tax revenues. With the next election in 2024, the major parties will set out their policies on taxation. All this leads to a more uncertain tax environment: for some clients this is unsettling; others are more sanguine.

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. The UK adopted the Legal Entity Identifier for firms subject to the EU Markets in Financial Instruments Directive.

The UK has adopted the OECD’s Mandatory Disclosure Rules requiring intermediaries to inform the tax authorities of schemes to prevent the identification of the beneficial owners of entities or trusts.

The UK has established three beneficial registers since 2013:

• a corporate register of Persons with Significant Control with effect from 6 April 2016;
• the Trust Register in 2017, which has since been considerably extended; and
• the Register of Overseas Entities owning UK real estate, introduced in 2022.

The UK provides public access to its registers except in relation to trusts unless a legitimate interest can be provided and in relation to some information relating to individuals. Despite an EU Court of Justice ruling in November 2022, the UK government maintains that its approach is not inconsistent with the European Convention on Human Rights.

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

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. This may be an increasing influential strand in the years ahead.

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

On death an individual domiciled in England and Wales is free to leave their estate in the UK to whomever they choose. 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, being 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 may leave family members inadequately provided for. 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 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 considerations such as forced heirship or Sharia 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 several countries. It is vital to have a detailed understanding of a family, its circumstances and assets, and to work closely with advisers in other jurisdictions.

In the UK, succession 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 succession law takes domicile as its starting point, other countries may apply different concepts, such as nationality or habitual residence. 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. This leaves the individual and their advisers 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. For the averagely wealthy, the best advice may be for those in advancing years to simplify the location of their assets where 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 these may apply to movable assets in England and Wales 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 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 their will/the intestacy rules).

England and Wales does not recognise prenuptial and postnuptial agreements as legally binding. However, an agreement may 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 prenuptial and postnuptial agreements can be used to ring-fence premarital 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 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.

Consequently, other options are being explored such as the family investment company (FIC), 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 transfer will be covered by the terms and conditions agreed when the account was set up. Many providers will not allow access to anyone else.

In England and Wales, if the deceased’s rights under the contract with the provider survive death, 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. 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 been used increasingly for tax planning but significant changes in their IHT treatment in 2006 mean they no longer confer the same tax advantages. The focus is shifting back to the use of trusts for succession purposes as a means of providing for the family 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 the age of 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.

Alternatively, a family investment company may offer the opportunity to pass assets on to younger generations in a tailored, controlled and tax-efficient manner (see 2.6 Transfer of Assets: Vehicle and Planning Mechanisms).

Trusts were invented by the English courts, and the current law of trusts is derived from judicial decisions in reported cases. These have 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, a trust’s residence status 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.

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.

Complex rules apply to the taxation of income and gains derived from assets held by an offshore trust. 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 on the settlor or the beneficiaries (depending on residence and domicile status and where the benefit is received).

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

• the trust deed may contain 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.

Under English law, a settlor may exert a degree of control over the management and ultimate destination of the assets after they have been settled. For UK resident trusts, this is usually by the settlor being one of the trustees, which has no adverse tax consequences as long as the settlor/trustee is not also a beneficiary.

The settlor may also reserve the power to appoint new trustees. It is unusual for the settlor of a UK resident trust to reserve the range of powers that might be considered for an offshore trust, and there are no specific statutory provisions under English law that enable a settlor to do so. An English law trust with wide settlor reserved 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.

Trusts have 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 trustees have legal ownership and hold the assets for the benefit of a defined class of potential beneficiaries, who typically comprise members of the settlor’s family. For tax reasons, the settlor is normally excluded from any benefit from the trust. In a modern trust, trustees are typically 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, if the business owner were to place part, or all, of their shareholding into trust, those shares are registered in the names of trustees, who then hold the voting rights. The settlor could be a trustee 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 help determine the dividend policy of the business through the appointment of directors and thereby control how funds from the business are used for the benefit of the owning family.

The trustees are not necessarily involved in the day-to-day running of the business; professional managers or family members can be appointed to run it. The trust deed usually provides the trustees with all necessary powers to enable them to hold the shares, join in any shareholders’ agreement, and provides protections for them if the business gets into difficulties.

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

Potential tax liabilities are associated with the creation of a trust, and during its existence, although a family business will typically benefit from a favourable tax treatment which will minimise any tax charges.

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;
• the next generation of owners may not share the founder’s talent, leaving the business to fail; or
• the next generation may simply not be interested in the business and choose to sell it.

The key to successful succession planning is to use tax reliefs where they are available to protect the value in a business. Where it is envisaged that the business can go on for multiple generations, 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 the owner will need to give up ownership, whether in his lifetime or on death. If they want to restrict the next generation’s ability 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 include:

• restrictions on shares being transferred outside the family; or
• pre-emption rights giving other family members, or the company itself, options for the company to buy back the shares.

Alternatively different share classes could be created, retaining shares with voting rights, and giving shares holding the value of the company, or diverting 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 dispose of it. Such an agreement would require the co-operation of all shareholders but could be of considerable value if one generation of shareholders is in agreement on how to transfer the business to the next. 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 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. 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. 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, the “extra reward” for those working in the family business as directors being dealt with by a director remuneration policy.

A minority stake in a private company has limited appeal in the open market. It is usually possible to agree with HMRC that a transfer of a partial interest in a business or company has a value less than the pro-rata proportion of the total value of the business. The discount that will be applied will depend on various factors, including:

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

More than half the adult population of the UK does not have a will, meaning those individuals are at risk of dying intestate. This can give rise to disputes as the Intestacy Rules often impose unsatisfactory consequences for the deceased’s family, particularly for cohabiting couples and families with stepchildren. 

Family structures are growing increasingly complex. Fewer people are getting married, choosing instead to cohabit, and going on to create families outside marriage or civil partnerships. “No fault” divorce was introduced by the Divorce, Dissolution and Separation Act 2020 coupled with an online divorce process. The Act was widely welcomed, enabling separating couples to divorce in a more civilised and less confrontational way. 

Since February 2023, the legal age to marry has increased from 16 to 18 but it is too early to assess the impact of this. It is hoped that this change will protect vulnerable, young adults from harmful marriages.

People are living longer, increasing the scope for second or third marriages, with heirs having to wait longer for their inheritance. An aging population leads to an increased prevalence of mental capacity issues, and the associated risk of financial abuse and fraud of the elderly and vulnerable. This can result in applications to the Court of Protection during the person’s lifetime to (most commonly):

• remove an attorney;
• prevent a power of attorney from being registered; and
• seek the return of money taken.

It can also result in an investigation into the lifetime transfers after death, with a view to undoing them. 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 are also more likely.

Claims where it is alleged that a testator was coerced into drawing up the will, and claims in forgery, may arise where there has been no oversight from a legally qualified professional in the preparation and execution of the will.

Trust disputes have increased since the introduction of the General Data Protection Regulation (GDPR), as non-beneficiaries of a trust such as a divorcing spouse or creditor now have a means of accessing confidential trust information. Trustees and settlors are rethinking the way they structure settlements, how they deal with information and the jurisdictions they use. As a result, trustees are likely to make more applications, for their own protection, seeking the approval of the court in relation to a decision they consider may be challenged by one or more beneficiaries.

Applications under the Variation of Trusts Act 1958 are a useful tool in estate planning for high net worth families as they look to the future and how they can benefit future generations. Reasons why it may be desirable to vary the terms of a trust include:

• succession planning;
• taxation;
• governance considerations;
• altering a beneficial class; or
• accelerating or postponing the vesting of absolute entitlements under the trust.

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

If a will is found to be invalid, the previous will stands, and a successful claimant will receive the provision set out for them in that will. If there is no previous will, their entitlement will be determined by the intestacy rules.

If it is found that gifts were made during a person’s lifetime when they did not have capacity to make them, the court can intervene to undo the gifts and order that these gifts are repaid 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), uncertainty remains as to whether the correct remedy is fulfilling the promise made in full or in part or providing compensation for the loss suffered by the promisee. Recent cases suggest that the courts are now rowing back from what was a developing trend of claims being made while the alleged promissor was still alive.

In a successful claim for reasonable financial provision, the court has wide-reaching powers, including:

• making of an outright capital award;
• establishing a life interest in trust or estate property; or
• varying a trust to ring-fence a portion for the claimant.

The level of award made will depend on whether the claimant is a spouse or civil partner (where a more generous test is applied) or a child or a person who was being maintained by the deceased at the date of the deceased’s death.

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.

Corporate fiduciaries are not as prevalent in the UK as they are in international finance centres. Individual trustees are common in express and statutory trusts in the UK, and will usually be drawn from professional advisers, family members and family friends. A higher duty of care is expected from corporate and professional fiduciaries, and this is enshrined in legislation.

Trusts also arise through land ownership in England and Wales, so there are many 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.

Trust legislation in the UK makes a distinction between corporate trustees and a trust corporation.

A trust in the UK has no separate identity; it is the trustees acting as a body who are subject to personal liability. Consequently, the trustees need to ensure that:

• there are sufficient protections in the terms of the trust (eg, appropriate exoneration clauses depending on their standard of expertise);
• they take steps to limit their liability when contracting with third parties; and
• they consider bolstering their right to be reimbursed for properly incurred expenditure by preserving their equitable lien and taking express indemnities when distributing assets to beneficiaries.

The trustee should also ensure that the powers conferred on the trustee expressly by the trust will, when coupled with the statutory powers, enable them to deal with the assets of the trust.

The quite narrow approach to trustee investment allowed by the Trustee Investment Act 1961 was modernised by the Trustee Act 2000 in the wake of the deregulation of the City of London in the 1980s/1990s. This allows trustees to invest as if they are absolute owners but also provides that they must have regard to standard investment criteria when exercising their powers of investment and reviewing their investments (which might include Environment, Social and Governance (ESG) investments with robust credentials) 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 appropriate advice and are permitted to delegate their investment function, provided they give (and review) their guidance in an investment policy statement. Trustees have an 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 when considering investments.

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 to reduce 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 using sufficient information 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.

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. The need to establish domicile often arises 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 time.

An individual starts life with a domicile of origin based upon the domicile of their father (or their mother if their parents are unmarried). The rules concerning domicile of origin are particularly complex where a child is born to same-sex parents or through surrogacy.

Domicile of origin can change up to the age of 16 to a domicile of dependence if the relevant parent changes domicile. Thereafter it can change through an individual’s own actions by residence and intention to stay in a new territory indefinitely. 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. More recently, UK tax law has extended the concept of deemed domicile from applying only to IHT to a general application to direct taxes. An individual is now treated as UK tax domiciled after living for 15 out of 20 tax years in the UK. For UK tax, it is difficult to shed domicile instantly; an individual leaving the UK will be deemed domiciled for at least three years after ceasing residence and changing domicile.

Residency

In the UK, as in many other countries, residence is a significant determinant in relation to the liability for payment of taxes. Since 6 April 2013 there has been a Statutory Residence Test (SRT).

The SRT is complex and its application fact specific; as a result, seeking professional advice is recommended. Briefly, under the SRT, some automatic tests are applied. An individual will automatically be UK resident if they spend more than 183 days in a tax year (6 April to 5 April) in the UK. This is also the case 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 they are present in the UK home and either have no overseas home or, if they do, they spend fewer than 30 separate days in any particular overseas home.

An individual will be automatically non-UK resident if:

• they spend fewer than 16 days in the UK in any tax year;
• they spend fewer than 46 days in the UK in a tax year having been non-UK resident three of the preceding tax years; or
• they work sufficient hours overseas, 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. Their residency depends upon the number of “ties” they have to the UK and whether they are an “arriver” (they have been non-resident throughout the preceding three tax years) or a “leaver” (they have been UK resident in at least one of the three prior tax years). The “ties” include the following:

• a family tie through the presence of a spouse, civil partner and/or minor children;
• an accommodation tie (not necessarily home ownership);
• 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 are a “leaver” and spend more days in the UK than any other country; and
• a work tie.

Usually, an individual is either UK tax resident or non-resident for a whole tax year. In some cases, “split year” treatment can apply so the individual is treated as resident for part of the tax year only for most tax purposes. It is 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 several 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. Routes to citizenship include:

• 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 based on:

• 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; and
• 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. There are exceptions to the general rule about obtaining indefinite leave after five years’ residence, with several visa categories offering “accelerated” settlement eligibility after just three years’ residence in the UK, although only two remain open to new applicants:

• the Global Talent scheme (for those working in a qualifying field as a recognised or emerging leader); and
• the Innovator Founder visa (for entrepreneurs seeking to set up a business in the UK).

Both of these routes require endorsement from a third-party “endorsing body” and are subject to relatively complex requirements under the Immigration Rules.

As noted above, trusts are particularly suitable for use as a safeguarding tool for vulnerable persons because responsibility for management of assets rests with trustees, but benefit is made for the vulnerable person.

Under tax rules, vulnerable beneficiaries are those under the age of 18 who have lost a parent, those with disabilities who are eligible for certain state benefits (even if they don’t claim them) and someone who is unable to manage their own affairs because of a mental health condition including learning difficulties.

Trusts for disabled persons can be settled either by the disabled person themselves (which often happens with, say, compensation awards after accidents) or other donors, such as parents.

Whilst a discretionary trust may remain the most flexible form of trust, specific tax rules apply to trusts for disabled persons with no immediate lifetime IHT issues for the donor provided certain conditions as to the beneficiary’s income entitlement are met.

For trusts created on death, the availability of particular tax treatments to bereaved minors and beneficiaries aged 18 to 25 provides trust structures for safeguarding minors alongside the other main trust structures referred to above.

Those planning to benefit vulnerable beneficiaries always need to take specific account of the rules regarding the availability of state benefits, which may be withdrawn where a beneficiary has entitlement to capital or income above stated levels.

Appointment of guardians for minor children can be made by parents or by existing guardians, by the will of a parent or by a separate document. Otherwise, the Court holds power to appoint a guardian for a minor child and to intervene in any case to protect the best interests of a child.

In England, the Court of Protection grants and supervises a deputyship for a vulnerable adult.

Since 1985 there has been a regime for powers of attorney that will survive or take effect upon a donor’s incapacity, initially through enduring powers of attorney and since 2007 by ‎making lasting powers of attorney (LPAs). Today, individuals can make LPAs to cover:

• property and financial affairs; and/or
• health and welfare issues.

A health LPA can only be used once the donor has lost capacity whereas a property LPA can be used (if the donor chose to allow it) before loss of capacity.

These enable an individual to appoint one or more persons to act as their attorney(s) to take decisions on their behalf following incapacity. Use of such powers enables an individual to appoint attorneys they trust, and to avoid the costs and expenses that would arise on a court application 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 Office of the Public Guardian, part of the Court of Protection which has a continuing supervisory function. Concerns about the actions of an attorney can be reported to a safeguarding unit.

Where no power of attorney is in place, 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. Given Court timeframes and the cost of going through the process, the LPA route is more cost effective.

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 other legal documents has assumed greater legal complexity. Specific advice needs to be obtained.

It remains the prerogative of the testator or settlor to choose whether to define the term “children” in their will to avoid any confusion about who should be included within that class. For example, a testator could define “children” to include their stepchildren, 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 testator or settlor. Without a clear definition, the law may dictate an outcome that was not their intention.

The traditionalist family model – ie, husband and wife who produce children after marriage – is now one amongst a number of others, resulting from changes in societal values and advances in science and technology. With many children born to unmarried parents, parents marrying (again), stepchildren frequently come into the picture, creating a “blended” family. Trends in artificial reproductive technology have made elective single parenting possible, as well as extending the options for same-sex couples.

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 whose parents are unmarried. 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 trust are therefore deemed to include the testator’s or settlor’s adopted children.

With in vitro methods and surrogacy, changes to the law have been made to recognise the diversity of family models. In the UK, surrogacy is legal, but it cannot be advertised or commercialised and surrogacy agreements are not enforceable. As the surrogate will be the child’s legal parent at birth, it is usual to transfer legal parenthood by parental court order or by adoption.

There have recently been calls for a modernisation of the surrogacy process to make it more streamlined.

Medical 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 or marry. Civil partners and 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 marriage.

The UK does not recognise domestic partners and despite repeated calls for legislative change to protect vulnerable parties to non-marital relationships, there is no de facto relationships legislation. Without a will in place to make appropriate financial 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. Surviving cohabitees may also be excluded from receiving life assurance and pension benefits.

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 provides an income tax relief for cash gifts and allows charities to reclaim the basic rate of income tax on personal donations from a UK taxpayer. 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. However, there must also be sufficient taxable income and 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 the estate is reduced from 40% to 36%. This relief applies to the estates of those who died on or after 6 April 2012.

The Cultural Gift Scheme has an element of philanthropy and allows individuals or companies to offer pre-eminent objects as gifts to the nation in return for a limited tax reduction. If eligible, the individual donor of the gift can reduce their liability to income tax, CGT or corporation tax by 30% of the fair market value of the object or 20% if a company. An independent expert panel is used to determine whether the object is eligible to qualify as a donation under the scheme, is in an appropriate condition and is offered at fair market value.

The trust instrument charity (TIC) is the generally favoured vehicle for an exclusively grant-giving foundation, and where the risks associated with operations 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 (likely to be subject to greater third-party risks), the typical vehicles are a company limited by guarantee (CLG) or a charitable incorporated organisation (CIO), a recently created UK corporate charitable body. 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 company on registration with Companies House, which is a much faster process than registration with the Charity Commission, the second stage for a CLG that confirms its charitable status.

Other structures for charities such as an unincorporated association or a royal charter corporation are available but are generally less common in charitable planning.