High net worth individuals (HNWIs) often attempt to reduce their Inheritance tax (IHT) liability by making lifetime gifts of selected assets in the hope of surviving the gift by seven years, when the value of the asset given will fall out of their estate for IHT purposes. Such gifts may not, however, be appropriate if the HNWI’s children are not considered old enough or sensible enough to receive large sums of money. The HNWI may also be concerned about what happens if an adult child’s marriage were to break down, or the HNWI may not yet have decided how they would like thier assets to be distributed between their children.

Traditionally, especially before 2006, the use of trusts provided a protective wrapper for the assets given away. However, the changes to trust taxation that were introduced in 2006 means that gifts to most trusts in excess of the IHT nil rate band incur an immediate charge to IHT at 20%. This puts a practical limit on the amount that can be gifted into trusts (£650,000 every seven years, for a couple) unless an exemption can be claimed, such as the normal expenditure out of income exemption.

An alternative to trusts

An HNWI who wishes to make a substantial lifetime gift but does not wish the recipients of the gift to be able to realise the asset in question could consider a Family Investment Company (FIC).

FICs are limited or unlimited family companies which do not trade but are used as a vehicle for receiving, growing and protecting family wealth. HNWIs can subscribe for different classes of

shares in their family company, putting as much cash into the company as they wish without incurring a tax liability. Shares can then be given to younger members of the family and this will be a potentially exempt transfer by the founders of the company; and IHT free if the donor survives by seven years. The shares given may have limited rights to income and are likely to have no voting rights attached to them. This means that control of the company will remain with its founders and the directors.

The shares received by the younger generation may have a substantial value attaching to them but the company’s Articles of Association can ensure that the shares cannot be transferred to anyone outside of the family. This prevents the younger generation realising the value of the shares and spending the proceeds in a way that might not be approved of by their parents.

A vehicle to grow family wealth

FICs are a tax efficient vehicle for preserving and growing the family’s wealth. The company’s profits are liable to Corporation tax of 20% in 2015/16 but if dividend distributions are made to shareholders who are non-taxpayers or basic rate taxpayers then there will be no further tax liability on the dividend.

Continued on page 2

The High Net Worth Individual and Family Investment Companies

Welcometo the May edition of our Wealth, Health & Inheritance Briefing

It’s been quite a month, with a few surprises. From a tax planning perspective, the election of a majority Government does mean

that we have greater certainty as to what might be coming down the track in terms of legislation, including the changes to the taxation of relevant property trusts discussed in our last issue.

In this issue our experts look at the use of Family Investment Companies, the ownership of Bitcoins and the use of formula clauses in Wills. In the light of recent pension deregulation, our Financial Services Litigation Partner, Philippa Hann, addresses the vital issue for many of our readers of FCA requirements for client risk warnings tailored to their personal choices.

This month the team is delighted to welcome Gillian Kennedy-Smith who specialises in international matters and joins us from the Channel Islands. Gillian is based in Bristol but regularly visits all of our regional offices. Gillian tells us more about her work in our Focus On section and she also writes about the new Dubai Wills Registry, a development that I am sure will be welcomed by your expatriate clients who are resident there.

Anthony FairweatherPartner0845 209 1265anthony.fairweather@clarkewillmott.com

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Any profits retained in the company can continue to grow and be distributed at a later date perhaps at a time when a former higher rate tax payer pays tax at the basic rate.

Using trusts in conjunction with FICs

At the point that an individual uses a FIC to make a substantial transfer of wealth to the next generation, they may not have decided how they would like the shares given transferred between their family members. To incorporate a greater degree of flexibility it is possible to transfer shares in the FIC with a value up to the current IHT nil rate band to a discretionary trust. The trust can have a wide class of beneficiaries, enabling a decision as to who receives what benefits to be postponed to a later date when the situation may be clearer.

For example, Jeremy has a substantial estate following the realisation of a number of assets and would like to make a transfer of £1 million to his only daughter. Jeremy’s daughter is successful in her own right so Jeremy would like to retain the ability to benefit any future grandchildren. In order to start the seven year period running, Jeremy would like to make the transfer immediately. He therefore sets up a FIC with several share classes and transfers non-voting shares to his daughter. A further £325,000 worth of shares is transferred to a discretionary trust, the beneficiaries of which are his daughter and grandchildren.

In that way Jeremy can make provision for his unborn grandchildren but ensure that the transfer is made immediately.

Are there any disadvantages?

A capital gains tax charge will arise on the transfer to the company of non-cash assets which have in-built gains and it is unlikely that a FIC will be a tax efficient vehicle for property. The best asset with which to create a FIC is cash.

There can be an element of double taxation if dividends are paid to higher rate tax payers but the payment of dividends in these circumstances can be avoided with good planning.

In general, FICs incorporate a new weapon into the tax planner’s armoury enabling the practical restrictions on the amount of a transfer into a relevant property trust to be overcome and ensuring that a potentially exempt transfer can be made to the next generation with an element of protection.

For further information please contact: Carol CumminsConsultant0845 209 1275carol.cummins@clarkewillmott.com

The High Net Worth Individual and Family Investment Companies: continued

02 Wealth, Health & Inheritance Briefing May 2015

Focus on: Gillian Kennedy-SmithSenior Associate Gillian Kennedy-Smith joined Clarke Willmott’s Private Capital team in March to expand our international expertise. Here she tells us about her work:

What led you to specialise in international private client work and what do you like most about your work in this area?

My father was in the army so I have always been fascinated by other countries and how they function and

work together. When I qualified, I moved to Guernsey to gain some offshore experience. I expected to stay there for two or three years but I enjoyed the work so much I stayed there for eight years.

International private client work requires you to consider factors which would not necessarily be relevant for clients based solely in the UK, such as how they are affected by forced heirship provisions. I particularly enjoy the interaction between the jurisdictions and working closely with clients and their advisers who vary from the “right hand man” to IFAs, lawyers and accountants.

What is the most important action that someone with multi-jurisdictional assets can take?

It is essential to understand the local laws of the relevant country, talk to advisers and family and make sure those thoughts are put into action.

Good advice not only gives you peace of mind it also eases the way for those left behind. If you don’t take advice then you are not only failing to control where your hard earned assets end up, you are not necessarily taking advantage of all the tax savings you are legally entitled to. This is not tax avoidance, it is just applying the letter of the law to reduce your tax liability, to provide more for your family.

The cost of obtaining good advice now should be seen as an investment to be set off against potentially substantial Inheritance tax savings on death. While this may not benefit clients personally it will ultimately benefit their families when they are at their most vulnerable.

Which jurisdictions do you deal with most often?

The offshore world is quite dynamic. New laws are enacted to assist the local financial services providers in competitive markets so certain jurisdictions may be popular for a few years before being overtaken by others. When working offshore my key clients lived in the Middle East, France, Guernsey and Russia, but that did not necessarily mean their portfolios and estates were restricted to those jurisdictions.

In England there is always a fair amount of interest from the traditional “second home” jurisdictions such as France and Spain but so far, since joining Clarke Willmott at the end of March, I have had queries relating to Australia, Berlize, China, Canada, France, Italy, Spain and the US. I have been lucky enough to build up my contacts overseas and where appropriate I can refer matters to people I have worked with previously in order to make matters easier for clients.

What are the most live issues in your area of specialisation?

For me the primary consideration is how domicile can affect plans, but generally the current focus of interest appears to be in two areas: politics and reserved rights of Inheritance.

Following the recent general election we are all aware of how the political climate can affect Wills, trusts and succession planning. It is too early to know what changes will come in, but topical discussions included changes to the charge for the remittance basis, the “residential non-dom” status or more simply extending the nil-rate band to provide relief against the main residence.

Another live area mainly affects those clients with second homes or who live in other jurisdictions for a period of time. Brussells IV and the UAE Registry (discussed in the article on page 3) come into force this year, enabling some clients to deal with their estates in a manner which truly reflects their wishes. They will need to take appropriate advice, but until this year they would not have had the same freedoms and could not, for example, have avoided reserved Inheritance rights.

Which has been your most interesting case?

It would be difficult to pick a single matter but I would probably say the longer the relationship the more interesting the work becomes. Work for three of my long standing clients has involved liaising with French Wealth Tax experts, Alderney land disputes, the IRS and resolving immigration issues.

I worked on a very interesting philanthropic trust with a trust fund of US$20bn and, despite teams of very experienced advisers from four jurisdictions working closely together, it took 27 versions of the trust to create a perfect bespoke document which reflected all the wishes of the settlor. Sometimes it pays to be demanding but I wouldn’t necessarily recommend it for every client, particularly from a costs perspective.

What do you like to do when you are not at work?

Travelling, sports (skiing, tennis, touch rugby, biking and golf), reading, cooking for family and friends but generally doing anything that allows me to be either by the water or in the mountains.

03 Wealth, Health & Inheritance Briefing May 2015

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Greater certainty about succession for non-Muslim residents of Dubai

The laws of succession in Dubai

As a Muslim country, Dubai adopts Sharia law, which has its own particular laws of succession. These provide, for example, that an estate has to be distributed in a way fixed by law, with male heirs receiving double the amount received by female heirs and a wife receiving a much reduced proportion of the estate of her husband.

Obtaining recognition of a Will drafted in accordance with the testator’s domicile is possible, but this involves a protracted and expensive court procedure in the Dubai Courts, during which time the testator’s assets in Dubai are frozen, possibly causing hardship to the surviving family.

This situation has led to expatriates in Dubai removing assets from the country and consequently it has been recognised by Dubai that changes were necessary.

What is changing?

At the end of April 2015 a new Wills and Probate Registry opened in Dubai. The purpose of the Registry, which is an administrative rather than a judicial body, is to create greater certainty for non-Muslim Dubai residents with regard to succession to their Dubai assets. The new system will enable eligible non-Muslims to choose the way in which their estate is to be distributed, even if the system of succession law under which the Will dealing with Dubai based assets is made is quite different to Sharia law. Dubai is the first jurisdiction in the Middle East to introduce this system.

Requirements of the new system

To be eligible to register a Will with the Wills and Probate Registry the person making it must be a non-Muslim individual, aged over 21, who owns assets in Dubai. If the Will appoints a guardian for a minor child or children, the child or children must be resident in Dubai.

The testator must attend at the Wills and Probate registry to sign the Will in front of Registry staff. The original Will is retained as an electronic copy at the Registry for 120 years from the testator’s date of birth. There is a fee payable and it is suggested that this will be in the region of US$2,800.

Practical points

• If your client intends to appoint a guardian in the Will then the guardian is required to attend the appointment at the Registry. This could cause practical problems if it is envisaged that minor children will return to UK based guardians in the event of your client’s death.

• The registered Will must be valid in accordance with the succession law under which it is made. This means that, as with all Wills, it is advisable for it to be professionally drafted, by a person qualified to act in the relevant jurisdiction so that all requirements can be complied with.

• We would normally advise that, if your client has foreign assets, he or she makes two separate Wills, one for UK assets, and one for the jurisdiction in which the other assets are situated, so that the succession law applicable in each jurisdiction is taken into account. Having two Wills also means access to some of the estate’s assets is achieved quickly even if the Probate process in another country is delayed. For this reason we would still recommend having two Wills, even where succession law will not be an issue.

• The retention of the original Will by the Dubai Registry could throw up a practical difficulty as if there is only one Will it would be required by the UK Probate registry in order to obtain a Grant of Probate to deal with assets here. It is possible, however, that yet to be announced procedures will be drawn up to cater for this.

• As far as tax is concerned, your client will be liable to Inheritance tax on his or her worldwide assets while they remain UK domiciled if your UK domicile is lost you would pay IHT on your UK assets only. To lose UK domicile, broadly, your client would have to form a firm intention to live elsewhere permanently. As a UK domiciliary it is always advisable, in conjunction with making a Will, to take IHT planning advice.

This announcement is a positive one but if clients are resident in and own assets in Dubai, it is imperative that they make a Will and register it. Without doing this their family could encounter considerable problems obtaining access to the Dubai assets after your client’s death.

For further information please contact: Gillian Kennedy-Smith Senior Associate 0845 209 1095 gillian.kennedy-smith@clarkewillmott.com

Many British expatriates who own property in Dubai have, until now, faced the prospect of those assets being distributed on death according to local succession laws. The opening of the Wills and Probate Registry in Dubai will help alleviate this problem.

04 Wealth, Health & Inheritance Briefing May 2015

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Dying in a Digital Age: Bitcoins or virtual currency

In this article we look at the bitcoin and discuss whether it is an asset that clients can pass on to their chosen beneficiaries.

What is a bitcoin?

Bitcoins are commonly referred to in the media as a digital currency, but perhaps a more accurate definition is that bitcoin is a software based payment system which allows users to send and receive payments electronically, in the form of bitcoins.

Bitcoins differ from more conventional forms of money in that they are not linked to any “real” currency, so there is no central administrator or “banker” and no bespoke regulatory system or consumer protection. Further concerns arise because transactions can be made anonymously, so there is a risk that they may be used for criminal activity and price fluctuations mean that the value of bitcoin is volatile.

The bitcoin is, however, becoming more mainstream and recently there has been a noticeable shift in attitude towards its potential use in the UK. Last year the Chancellor, George Osborne, asked the Treasury to examine the risks and benefits of virtual currency and consider whether regulation is required to encourage innovation in the UK economy. This led to a recently concluded consultation and the announcement that the Government intends to apply anti-money laundering regulations to digital currency exchanges and develop voluntary standards for consumer protection. In addition, a new research initiative to address the research opportunities and challenges for digital currency is to take place.

One of the attractions of using bitcoins is that there are no fees for the vendor when they receive payment (unlike payment by a credit card for example) and once payment is made it cannot be cancelled, making it similar to cash.

For consumers the bitcoin is easy to use, there are no foreign exchange costs and transaction fees are low; and perhaps the fact that the bitcoin sits outside the control of governments and banks, recommends its use to those who are wary of institutions which perhaps have less trust since the financial crisis.

How does it work?

Bitcoins are bought from an online bitcoin exchange and, at the time of writing, one bitcoin trades at around £150. Once purchased the bitcoins need to be stored in a digital wallet, with various choices of provider available offering wallets for desktops, mobiles and via the web.

For each transaction the wallet supplies a bitcoin address to which any payments are sent; there is a new address for each transaction. This address acts as a type of public “key” while the bitcoin holder has a private key to authorise transactions from the wallet.

The bitcoin wallet therefore enables the bitcoin holder to transact with other users, and the private key is the vital tool that is necessary to open the digital bank vault.

How can bitcoin balances be passed on to a client’s’ family?

As with all digital assets it is important that the owner’s family knows that they own bitcoins. As discussed in our previous article, the use of a memorandum stored with the owner’s Will can be a very good way of alerting their executors to the existence of all digital assets, including virtual currency.

In the case of bitcoins, however, knowing that they exist is meaningless without the all-important key that allows balances to be transferred.

In the case of more conventional assets, such as a shareholding, the realisation or transfer of the asset can only take place once the executors have gone through the process of obtaining a Grant of Probate to an estate and producing a copy of the grant to the asset holder confirming that the executor has authority to deal with the asset. Bitcoins, by comparison, have no regulatory authority at present and perhaps can be seen as more akin to physical cash. If cash is stored in a home safe, the owner’s beneficiaries can take ownership of it after their death and spend or divide it simply by knowing that it is there and knowing the combination to the safe. With bitcoins the executors similarly need to be aware that the owner owned bitcoins and, crucially, know the details of their digital key.

The bitcoin digital key is therefore vital both for the owner and their successors and should be stored safely, perhaps in hardcopy or in an offline data storage device. Security is of course essential but it should be remembered that if the key is encrypted then the executors will also need to have the key to decrypting it which should be stored in a separate place. Again if the Will is held in safe storage this might be a good place to keep a record of the digital key.

Keeping the situation under review

The Bitcoin is evolving at a very fast pace and it is clear that virtual currency will become subject to greater regulation. This means that the method of accessing bitcoins could change as the system matures so it would be sensible for clients to keep developments under review to ensure that they maintain appropriate means of access for their chosen successors.

For further information please contact: Fiona DebneyPartner0845 209 1135fiona.debney@clarkewillmott.com

We have previously looked at the steps that the owner of a digital estate can take to ensure that their virtual assets are passed on after their death or loss of capacity.

Free information about private client tax and legal developments Would you like to receive additional free information about tax and the law that is relevant to you as a professional dealing with private clients and their wealth management? Clarke Willmott’s Private Client Extranet is designed specifically for financial intermediaries and other advisers and is quick and easy to sign up for and free to access.On our extranet we publish downloadable information sheets on a variety of topics that are relevant to private clients, including trusts and

tax for both lifetime and post-death planning, as well as family law, long term or elderly care and capacity issues. All of our information sheets are available in a printable format if you would like to hand them to your clients.

Our news section is updated regularly (usually once a week) with articles in which we discuss topical private client and tax issues.

Registration is free and takes only a few minutes. Access to the extranet is then available to you at any time. We will not clutter up your in box with emails that you might not want to receive.

Click here to register today and please feel free to tell any colleagues who you think might benefit. Please note, however, that the extranet is not suitable for direct access by clients and is intended as a tool to help the professional intermediary.

Pensions advisers will have seen the many reports that thousands of people have been calling for advice and information about pension freedoms, but there has been little focus on the new Conduct of Business Sourcebook (COBS) rules which require anyone in contact with a person considering their retirement options, to provide tailored risk warnings. These new rules have been parachuted into the regulations without consultation and can be found in COBS 19.

These rules reflect an on-going nervousness, on the part of the regulator, about the capability of the average person to make “poor choices”. Indeed consumer behaviour, and specifically in relation to retirement choices, was one of the headline concerns in the FCA’s 2014/15 Risk Outlook (now incorporated into the Business Plan rather than a separate document).

In response to the perceived risk that those considering their options in the run up to retirement will do themselves a mischief, the FCA has imposed a new Retirement Risk Warning requirement. This requirement took effect from 6 April 2015 and ought already to be part of your processes. The purpose of the rules is to ensure that anyone in contact with an adviser regarding their pension options receives warnings tailored to their personal choices, even when the client instructs the adviser on an execution only basis.

The COBS rules (COBS r19.7.7) state that warnings must be given “when the retail client has decided (in principle) to take one of the following actions (and before the action is concluded):

1. buy a pension decumulation product; or

2. vary their personal pension scheme, stakeholder pension scheme, FSAVC, retirement annuity contract or pension buy-out contract to enable the client to:

a. access pension savings using a drawdown pension; or

b. elect to make one-off, regular or ad-hoc payments out of uncrystallised funds; or

3. receive a one-off, regular or ad-hoc payment out of uncrystallised funds; or

4. access their pension savings using a drawdown pension.”

This could be a client calling for specific advice on accessing their pension savings or it could come up in a general conversation. In both cases, the requirement to give the warnings is triggered. A grey area is where a client might want to change their pension strategy; altering drawdown income, for example. At first blush the rules appear to relate only to the period prior to accessing the pension savings, but best practice must be, particularly where that income is to be increased, to warn them of the potential pitfalls. This should apply even when the instructions are execution only.

FCA imposes new requirements for Retirement Risk Warning

Isn’t that advice?

No, the FCA’s guidance is clear that, even where the warnings are given in an execution only scenario, this will not constitute advice. However, this can only be insofar as the warnings are not related to the merits of using a particular product.

The first step in the new procedure is to ask the consumer, in every case: “have you received financial advice (from an authorised entity) or received guidance from Pension Wise?” If a client hasn’t received regulated advice or guidance from Pension Wise you must encourage them to do so. Your role at this point is to “help them understand that accessing their pension savings is an important, sometimes irreversible decision” (Para 3.23 Retirement reforms and the guidance guarantee: retirement risk warnings). You should not take any further steps with the client until that message has been given.

What are the Retirement Risk Warnings?

The second step in the new procedure is to ask relevant questions about how the client wants to access their pension savings. So far, so normal, except that this requirement is also relevant to execution only clients. This will catch providers when the client contacts them directly, the only exceptions being when an authorised adviser contacts the provider on behalf of a client or when a client has already received retirement risk warnings and those warnings remain appropriate.

The questions ought to establish whether any risk factors are present and, if they are, risk warnings much be given, clearly and prominently, in good time, with a record kept on file.

The risk factors are described as “the attributes, characteristics, external factors or other variables that increase the risk associated with a retail client’s decision to access their pension savings using a pension decumulation product.”

The contents of the risk warnings themselves are not prescribed but guidance is given in COBS 19.7.12G as to the types of risk factors that firms should look for.

What happens if I miss or don’t give a warning?

Now that the rules have been enshrined within COBS, breach of them may result in action by the FCA or a legal claim for a breach of statutory duty by the client. Compliance with the rules is therefore imperative.

For further information please contact: Philippa HannPartner0845 209 1450 philippa.hann@clarkewillmott.com

05 Wealth, Health & Inheritance Briefing May 2015

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The danger of gifts in Wills using formula clausesMany of your clients may have Wills which contain gifts, either to an individual outright or to a discretionary trust, which are calculated by reference to the Inheritance tax nil rate band. Such gifts were particularly popular prior to 2007 when they reduced the Inheritance tax (IHT) payable on the death of a couple, often significantly.

Advisers should be aware that as the result of a recent Court of Appeal judgment the amount of the gifts under these clauses may in some circumstances be much more than may have been contemplated when the Will was made.

Mrs Smith’s Will

The case in question concerned the Will of the late Mrs Valerie Smith. Mrs Smith had made her Will in 2001 in which she appointed her two sons as executors. She left a legacy of “cash or assets of an aggregate value equal to such sum as is at the date of my death the amount of my unused nil rate band for Inheritance tax” to children and grandchildren, and the residue of her estate to a charity, the Woodland Trust.

Mrs Smith died in 2011 leaving a net estate of £680,805. Mrs Smith was a widow and her husband had died in 1984 with an unused nil rate band. The executors made a successful claim for Mrs Smith’s nil rate band to be increased by her late husband’s unused nil rate band meaning that the total IHT nil rate band claimed was £650,000; this was the sum which the executors argued should constitute the nil rate band legacy in the Will. The Woodland Trust disputed this, claiming the legacy should be £325,000. The case was decided by the High Court in favour of the family beneficiaries and the Woodland Trust appealed to the Court of Appeal.

The Woodland Trust argued that the inclusion of the words, “at the date of my death” in the relevant clause of Mrs Smith’s Will meant that any increase in the nil rate band as a result of the executors’ actions after Mrs Smith’s death was not included in the gift. They also argued that the use of the words “my unused nil rate band” indicated that she was only referring to the nil rate band available to her, and that Mrs Smith cannot have intended that the amount of her legacy to her family should depend on whether or not her executors made a claim for her late husband’s unused nil rate band.

The Court of Appeal’s decision

The High Court’s decision in favour of the family was upheld on the following grounds:

• Mrs Smith did not have in mind a specific amount for the legacy to the family when she made her Will. She would have recognised that the purpose of using a formula clause was because the amount could be different at the date of her death.

• The effect of the executors’ claim was to retrospectively increase Mrs Smith’s nil rate band.

• Mrs Smith’s implicit purpose in making her Will in the way that she had was to give as much as she could give without incurring IHT to her family and the rest to charity. Construing the nil rate band gift as amounting to £650,000 was in line with this implicit purpose.

• The family’s case was also supported by the wording of s8A Inheritance Tax Act 1984 (the legislation that introduced the transferable nil rate band) as this provides that where a claim is made under s8A the deceased’s nil rate band is to be treated as increased by the percentage calculated in accordance with the statutory provisions.

The practical implications

Mrs Smith’s executors clearly took the view from the outset that the family legacy amounted to £650,000 otherwise there would have been no point in making the claim for Mrs Smith’s late husband’s nil rate band. Although all cases on a Will’s construction can be said to turn on the particular wording of the Will in question, and sometimes the surrounding circumstances of the case, the fact that s8A treats the deceased’s nil rate band as being increased would suggest that, in most cases where a transferable nil rate band is available, a formula legacy will be capable of being construed as amounting to the total of the deceased’s unused nil rate band and that of his or her late spouse or registered civil partner.

If the legacy in question is to a discretionary trust, the trustees will obviously have discretion over to whom the legacy is distributed, but no such flexibility exists with an outright gift to an individual.

We would suggest that clients with these formula gifts in their Wills should review them as soon as possible.

For further information please contact: David Maddock Partner 0845 209 1205 david.maddock@clarkewillmott.com