Money and death: the essentials of succession planning

Succession planning is crucial if a family’s business and personal wealth is to continue to grow from one generation to the next. Finding the right time to bring up the subject of money and death can be hard; there are often hurdles to be overcome and difficult decisions to be made. The main issues that arise are when to pass on assets, the structure to provide flexibility over who ultimately benefits and how to retain control over the gifted assets.

HM Revenue & Customs recently commissioned a research report to understand gifting behaviours. Individuals with wealth of more than £500,000 were more likely to make lifetime gifts than the less wealthy, and not surprisingly nearly a quarter of those aged over 70 had made gifts in the previous two years. Having considered a number of factors including marital status and children, the analysis found that only age and wealth were significantly associated with the making of lifetime gifts. Interestingly, the primary reason for gifting was a wish to help the next generation rather than to save Inheritance Tax (IHT).

Even if your motive is to minimise tax on death, no planning can be undertaken without considering financial independence and other taxes. Parents will not want to pass on their business or personal wealth if they cannot afford to. For many this means putting in place sound remuneration, pension and investment strategies long before gifting is contemplated.

Many business owners may not understand the tax implications of extracting profit from their business. Taking a relatively small salary could still provide a qualifying year for the state pension, but without the need to pay national insurance contributions, which can be over 20% of salary. Income can be topped up with dividends, which attract a lower tax rate for the owner / director, and the retirement fund can be boosted by contributions to a pension.

For those wishing to invest long-term, selecting a tax-efficient corporate structure may allow for income to be reinvested tax-free, and for investment income or capital gains to be used for pension contributions. Such structures can also provide a bespoke vehicle for passing wealth to the next generation and, if required, tax-free access to the capital contributed.

Recently, the Government asked the Office of Tax Simplification (OTS), an independent adviser to come up with a list of options for simplifying IHT. Suggestions included:

  • Replacing the gift exemptions and the relief for gifts out of income with a single lifetime and personal gift allowance;
  • Reducing the period after which gifts are exempt from IHT from 7 years to 5 years;
  • Abolishing the reduced rate of IHT where a person dies within 7 years of the gift but survives more than 3 years;
  • Removing the tax-free uplift for capital gains tax if there is an IHT relief on death. This would largely affect the transfer of businesses and agricultural property.
  • Bringing furnished holiday lets in line with income tax and capital gains tax so that they qualify for IHT exemption.

Currently there are no definite plans to implement any of the proposals.

If succession planning isn’t on your radar, I would encourage you to think about it as soon as possible. Setting clear objectives, holding discussions with your family and timely implementation are key. Feel free to contact me at or call 0131 558 5800.