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Atholl Browse

Spring 2010

WELCOME I am delighted to welcome you to this spring edition of Atholl Browse. Thank you all for the very positive feedback on the last edition. The Chancellor's pre-Budget report at the end of last year announced that the inheritance tax nil rate band will stay frozen for the next tax year. This means that it is even more important than ever for individuals to plan for the future. In addition, despite rumours to the contrary, the level of capital gains tax stayed the same at 18%. Therefore, now may well be a very valuable window of opportunity to pass assets down a generation, when both asset values and the rate of capital gains tax are relatively low. We are also very pleased to welcome a new associate, Tessa Till, to the department. Tessa is dual-qualified in Scots and English law and we are delighted to have her expertise which adds further strength and depth to the department. Tessa's article here highlights some of the differences between English and Scots law and factors we should all take into account when we are considering our wills. We also update you on developments in Family Limited Partnerships, including some case studies of how putting such a structure in place provides great inheritance tax benefits. Susanne Beveridge, Partner


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The North / South divide - a question of domicile? Making a will is an important step in life and helps give you peace of mind about who will inherit your estate when you die. But have you considered whether you have a will in the correct jurisdiction? There are differences in the succession laws of Scotland and England & Wales, and where you are domiciled can affect how your estate will pass on your death and in which jurisdiction you should have a will. Domicile is a different concept from residence, and where you live might not necessarily be where you are domiciled for succession purposes. For example, you may have lived in Scotland all your life but recently moved to London for work. That may not necessarily mean that you have an English domicile, as your closest connections may still be to Scotland, and you never considered your move to London permanent. If this is the case your estate will be subject to the Scottish law of succession upon death - and in this case you should have a Scottish will in place. So what are the differences between the succession law of Scotland and England & Wales? One of the main differences is that of ‘legal rights’ which exist in Scotland but not in England & Wales. Legal rights are the automatic rights of a spouse and / or children to a proportion of your ‘moveable’ estate (all assets except land and buildings) regardless of how you provide for them in your will. These rights are very common in most other European countries, but England & Wales have never had them. In England & Wales, a spouse, child or dependent (i.e. co-habitee) who is omitted from a will as a beneficiary does not have an automatic right to claim a proportion of the estate, but does have a statutory right to make a claim under the Inheritance (Provision for Family and Dependents) Act 1975. However, the onus is on that beneficiary to make a claim against the estate and there are certain time limits attached to such a claim. Whether you are

domiciled in Scotland or in England & Wales will determine which of these principles applies to your estate - so it is important to obtain the correct advice in order for you to be aware of the situations surrounding either legal rights or the 1975 Act which could arise after your death. Once you have established your domicile it is then important to make sure that a will is complete which is valid under the law of either Scotland or England & Wales. There are differences in how wills should be signed in both jurisdictions - for example, in relation to the number of witnesses present. It is important to make sure that your will is signed correctly to ensure that there are no problems with the administration of your estate following your death. Equally crucial is reviewing the question of your domicile on a regular basis - should your move to London, for instance, become permanent and you view England as your home for the foreseeable future, you should have an English will made. While preparing your will, it is also useful to consider who would deal with your financial and personal welfare matters should you lose capacity to do so during your lifetime. You can arrange this by putting in place powers of attorney. Again, powers of attorney come in different forms in Scotland and England & Wales, and for these to be effective you need to make sure you put in place the power of attorney which is most suitable for you given your own individual circumstances. It is a well known fact that a significant proportion of British citizens do not have either a will or powers of attorney, nor are aware of the question of their domicile. Having a will in the right jurisdiction will make sure that your estate passes to the right beneficiaries under the right rules of succession - giving peace of mind that your estate will be dealt with quickly and as you intended after your death. Tessa Till, Associate

Did You Know…? Did you know? Susanne Beveridge had an article published in the Sunday Telegraph on Family Limited Partnerships. This article has produced significant interest throughout the UK in using a FLP as a vehicle to pass assets down the generations to mitigate inheritance tax.

Guardianship orders Each year, the number of guardianship orders granted by the court has increased steadily. Guardianship orders allow a financial and / or welfare guardian to be appointed for an adult who has lost capacity to make decisions. However, like any court action, it can be time-consuming and expensive. To prevent a court action becoming necessary you can grant a power of attorney when you have the capacity to do so. This is a simple document in which you choose an attorney / attorneys to manage your affairs, whether financial, personal or both. The document can be signed at any stage and put away until a later date should it ever be required.


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ATHOLL BROWSE

Did you know…?

Did you know...?

Cohabitant Rights

Living Wills

If you are living with your partner, but are not married or in a civil partnership, and your partner dies without a will, you may be entitled to claim on your deceased partner’s estate. To do so will involve raising a court action. The court has a wide discretion in deciding on the award it will make.

It is possible to prepare an Advance Medical Directive, sometimes known as a ‘living will’. A living will sets out the situations in which an individual, who is unable to communicate his or her wishes, does not wish to receive further medical treatment.

If there is a will in place, this takes effect. If the will is out of date and you have not been provided for in your partner’s will, you will not be able to dispute the will or make a claim on the estate. The Scottish Law Commission has proposed that this law is amended and it is currently under discussion.

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At the moment, in Scotland, a living will is not recognised as legally binding but is taken into account when important medical decisions are made. In England, this area of law has developed quicker and English law now recognises, subject to certain conditions, the validity of a living will. It is thought that the Scottish Government may consider this in the near future.

Pension planning - be prepared It is often the case that if a person dies prior to retirement, a pension scheme makes a lump sum payment. Most such payments can usually be made from a pension scheme free of inheritance tax (IHT), and benefits can be written in trust and paid to a beneficiary (usually a surviving spouse or civil partner, if the person is married or in a civil partnership) chosen by the person. However, if lump sums are paid out of a pension scheme directly to a surviving spouse or civil partner, these will become subject to IHT as part of his or her estate. If he or she is already likely to face a liability to IHT, his or her estate will be increased further, meaning that any unspent death benefits will be subject to IHT at 40%. There is, therefore, the potential that the couple’s overall IHT bill is substantially increased. To solve this, it is possible to consider nominating any future, lump sum payments from a pension scheme to a discretionary trust. This is sometimes known as ‘spousal by-pass planning’ and involves the creation of a lifetime discretionary trust, which is designed to receive any lump sum death benefits if the person dies before retirement. The beneficiaries of the trust will usually include a person’s spouse or civil partner and children, with the surviving spouse or civil partner able to benefit from the income or capital of the trust (if required). For IHT purposes, the fund held in trust will not form part of the surviving spouse or civil partner’s personal estate, and will not be taxed to IHT on his or her death (which it would if death benefits are paid directly to the surviving spouse or civil partner).

It is also possible for the trustees to loan part or all of the assets to the surviving spouse or civil partner. This can be a useful estate planning tool, as it creates a debt on his or her estate, reducing its value for IHT purposes. On the death of the surviving spouse or civil partner, the fund would then usually pass to the children, perhaps reflecting the terms of the couple’s wills. However, if the children are themselves independently wealthy, their ‘share’ of the funds can be retained in the trust for them. Alternatively, ‘generation skipping’ means the trust can make over funds directly to the children’s own children (i.e. the couple’s grandchildren) without IHT consequences. This may be useful, for example, for payment of school or further education fees. In summary, considerable IHT savings can be achieved through spousal by-pass planning, whilst, at the same time, ensuring the intended beneficiary has access to the funds. Additionally, planning in this area can be extended beyond pension and death in service benefits to any type of life insurance. Alasdair R Fleming, Associate


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Update on Family Limited Partnerships In the autumn edition of Atholl Browse Hugh Stevens covered the topic of Family Limited Partnerships (FLPs). The FLP has been seen as the new kid on the wealth planning block over recent times and as an alternative to trusts for the purpose of passing family wealth down generations while retaining control of the assets. Our experience and expertise in setting up FLPs has been increasingly recognised over the past few months. The Chancellor's pre-Budget report at the end of last year announced that the inheritance tax (IHT) nil rate band for the tax year 2010/11 will stay frozen at the current level of £325,000 per individual. This measure was widely predicted and means that the rise to £350,000 provided for in the 2007 Finance Act will not come into force. In addition to the freeze in the IHT nil rate band, the Chancellor also announced anti-avoidance measures for some arrangements involving trusts which try to avoid IHT charges applicable to gifts into a trust over the value of the IHT nil rate band. These changes provide even more reason for wealthy individuals to look at ensuring that their affairs are structured in the most tax efficient manner possible to protect the value of their assets on death. The general idea is that a partnership is established to hold funds for various family members (most probably children or grandchildren). The family members are the limited partners and there is also a general partner, normally a company controlled by the donor, who is responsible for the whole management of the partnership. The limited partners are not entitled to take any part in the management of the firm. This gives control to the donor and provides similar benefits to a trust. The donor, through the general partner company, controls how and when distributions of capital and income are made to the limited partners and may decide not to make any distributions other than to pay the partners' tax bills.

Over the past few months we have set up FLPs for a number of clients throughout the UK. Each partnership agreement was adapted to suit the individual's own varying circumstances and wishes. The value of assets transferred to these FLPs ranged from £1m to £40m. Scottish FLPs can be set up for any client who is UK domiciled for IHT purposes, no matter their country of residence. The FLP requires to last for a set period and these periods have ranged from 10 years to 35 years, again depending on each individual circumstance. We have also combined planning for capital gains tax purposes with assets transferred to the FLP. In circumstances where significant wealth is involved current trust arrangements have been broken. Assets can then be transferred into a FLP therefore avoiding the significant ongoing periodic and exit IHT charges applicable to trusts. FLPs are generally suitable for clients who wish to look at minimising their IHT liability, and have assets above the value of £1m that they wish to give away and over which they wish to retain control. Many individuals wish to protect and keep control of assets for the benefit of their adult children, not simply for young children or grandchildren. FLPs are fast becoming the vehicle of choice for wealthy individuals wishing to pass on their wealth to the next generation. Brodies has significant experience in setting up FLPs and would be happy to advise you in more detail of the implications of these taking into account your own individual circumstances. Susanne Beveridge, Partner

Did you know? Carol Gourlay, one of our experienced paralegals, is running the London Marathon on Sunday 25 April. Carol is raising money for Parkinson's Disease Society and we wish her all the best for the day.

Articles by:

Susanne Beveridge Partner and Editor 0131 656 0218 susanne.beveridge@brodies.com

15 Atholl Crescent, Edinburgh EH3 8HA T 0131 228 3777 F 0131 228 3878

Alasdair R Fleming Associate 0141 245 6266 alasdair.robin.fleming@brodies.com

2 Blythswood Square, Glasgow G2 4AD T 0141 248 4672 F 0141 221 9270

Tessa Till Associate 0131 656 0022 tessa.till@brodies.com

www.brodies.com

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