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Protecting your wealth for the next generation

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Protecting your wealth for the next generation

As you look to the future of your estate, selecting the correct structure to use to transfer your wealth to the next generation is important. Here, we examine a number of structures that you could consider when planning for such a transfer.

Throughout your lifetime, you may establish some financial structures to support your lifestyle and prepare for succession. Even more structures may also be created on your death.

When deciding on the right structures to transfer your wealth to the next generation, there are a few key points to consider, including your tax status, the extent of your wealth and the level of control you wish to exercise.

Below, we have summarised a few of the possible structures you could consider, depending on the amount of control you would like and your tax status. Invariably, you will find that you will end up with a combination, as no single structure provides all of the solutions.

If you are a UK Resident, UK domiciled click here to see the structures most relevant to you. Alternatively, if you are a UK Resident and not yet domiciled click here to see specific structures applicable to you.

UK Resident, UK Domiciled

If you are a resident and domiciled (or deemed to be domiciled) in the UK, these are some of the structures you could consider to transfer your wealth.

Trusts

 

Benefits

Assets held in Trust for future generations are controlled by trustees. This prevents beneficiaries dissipating the Trust's assets, which could occur if the wealth was transferred directly to them.

When beneficiaries of a Discretionary Trust die, there's no further liability to UK Inheritance Tax (IHT) on their death. Distributions from a Trust are made at the discretion of the trustee, who will be guided by a letter of wishes that you prepare and update over the years. This letter could cover the protective measures that you would wish trustees to adopt, such as guiding your children to sign pre-nuptial agreements and the consequences if they don't do so.

Disadvantages

A Trust can be created during your lifetime or on death. If created during your lifetime, there's a potential IHT liability. Currently, this liability is 20 per cent on gifts into Trust (40 per cent on death) unless they are, for example, shares that qualify for Business Property Relief - in which case there's (currently) no IHT.

The tax treatment of Trusts is equivalent to the rates payable by an Additional Rate Taxpayer. Before funding these structures, detailed tax and legal advice is required to assess your suitability.

Corporate Structures

 

Benefits

Transferring wealth in order to build it for future generations can be done today, and any growth in value will be outside your estate from the date of the transfer. The initial wealth transferred would be a potentially exempt transfer (PET) and outside your estate after seven years.

The advantage is that you can control these structures during your lifetime and either pass control, on your death, to trustees or to the next generation if you feel that they are ready to assume the responsibility. In the interim period, these structures can be effective to help:

  • educate the next generation about the issues to consider when managing wealth
  • commence estate planning, while retaining a degree of control for yourself

Disadvantages

These are long-term structures and, if there is a requirement to liquidate them early, there may be a disadvantage if it's taxed as a dividend on liquidation. If assets that are standing at a gain are transferred into the Corporate Structure, this may result in a Capital Gains tax liability for you. Before funding these structures, tax advice needs to be obtained to assess any liabilities.

Wills

 

Your Will needs to be carefully drafted and updated so that it respects the integrity of the structures you have put in place during your lifetime. This will ensure that succession planning is coordinated in the way you wish it to happen.

If you're interested in learning more about protecting your wealth for the next generation, please contact your Relationship Manager.

Depending on the amount of control you would like and your tax status, you will find that you will end up with a combination of structures, no single structure provides all of the solutions.

UK Resident and Non-Domiciled (UKRND)

 

You may be able to take advantage of Trusts, Wills and Overseas Corporate Structures if you’re a UK resident who is not yet deemed as domiciled. However, complications may arise as a result of the special tax rules that apply to UKRNDs.

Trusts

 

Benefits

Just as with domiciled UK residents, assets held in a Trust are controlled by trustees. This helps protect beneficiaries from dissipating the wealth or using it in a way that would be against your wishes.

UKRND individuals can gain from from several benefits of creating a Trust, but with a significant advantage. Overseas assets, transferred to a Trust by a UKRND, are not subject to a 20 per cent charge on their value and the assets within the Trust can accrue tax efficiently.

Disadvantages

The tax treatment of Trusts created by a UKRND is particularly complex and has, over the years, been subject to significant changes. Legal ownership of assets passes to a trustee and distributions to UK resident beneficiaries will require tax advice as these can potentially result in a UK tax liability.

Overseas Corporate Structures

 

Benefits

Similar to UK-based corporate structures, you can utilise overseas corporate structures to manage and grow your wealth without having to give legal ownership to a trustee unless you wish to, upon your death. You could also pass control to the next generation if you feel that they are ready to assume the responsibility. Until that point, you can mange these structures as you see fit.

Such structures can be formed to enable growth in value but, unique to UKRNDs, if the initial transfer is made from overseas assets then the gift would be immediately outside your estate.

Disadvantages

The value of shares you own could remain in your estate for IHT purposes. You must take care to assess your options and the tax implications, prior to attaining deemed domicile status. The other disadvantages of this structure include paying a tax dividend on liquidation and the possibility of Capital Gains Tax liability if assets that are standing at a gain are transferred into the corporate.

Wills

 

A UKRND individual must consider Wills in the same way as an individual who is either domiciled, or deemed to be domiciled, in the UK. They must be carefully planned, drafted and kept up-to-date, with one additional consideration – care is required to ensure that there are no foreign legal issues that will impact the efficiency of the planning.

Whilst these structures may be effective tools to transfer assets to the next generation, there will be local law issues to consider, which may result in the desired outcome not being achieved.

If you're interested in learning more about protecting your wealth for the next generation, please contact your Relationship Manager.

This material is issued by HSBC UK Bank plc which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK. It has been issued for your information purposes only.

Please note that HSBC does not provide tax or legal advice and clients should seek professional advice from their tax advisor. Any reference to tax is based on our knowledge of the current and proposed tax regime and is subject to change.

In the United Kingdom, this document has been approved for distribution by HSBC UK Bank plc whose Private Banking office is located at 8 Cork Street, London, W1S 3LJ.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC UK Bank plc. Copyright© HSBC Private Banking 2022. 

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