Digital Assets Update: Apple’s Digital Legacy Program

• 12 October 2021
• News

Since we published our comments on access to digital assets after death in the FT Adviser earlier this year, the thorny issue has moved no further up the government’s list of priorities. However, it is encouraging to see a growing awareness of the problem among tech giants, who are beginning to introduce more in-service solutions to enable personal representatives and family members to gain access to a deceased person’s digital assets.

It remains impossible to direct by will the ultimate destination of assets such as your email account or your photos stored on iCloud. However, you should not take this as carte blanche to ignore them when considering your estate planning. We advised earlier this year that not only should you regularly review your online assets so you are aware of their extent, but you should also take advantage of all in-service options to give your preferred individuals the access they will need after your death.

We were pleased to hear Apple’s announcement last month that they will follow other service providers, (such as Google) in introducing a post-death process to streamline data access after a user’s death.

This announcement was made as part of the iOS 15 preview and is known as the Digital Legacy program. As it has not yet been released, there is still much speculation over the form that it will take, but it seems to be a way to grant designated users access to your iCloud account and personal information after your death. This should be particularly useful for those who store photos or videos on their iCloud account, or emails relating to bank accounts, credit cards, or shareholdings.

We understand that the Digital Legacy program gives a user the option to nominate an individual (known as a legacy contact) during their lifetime. On the user’s death, that legacy contact will, on presentation of the deceased’s death certificate, be able to view emails, photos, notes and more. Apple have reassured users that the digital legacy contact will not be able to see any payment information or other sensitive information.

While information about the scheme is limited at this stage, we understand that a key drawback is the requirement for the nominated legacy contact to have their own Apple ID. This will limit the scope of people whom you might be able to appoint as your approved legacy contact. In addition, Apple has implied that the data will be accessible for only a short period; this could prove problematic if the extent of the deceased’s assets takes some time to determine.

We anticipate and hope that Apple’s decision will prove an impetus for other smaller tech companies to introduce equivalent procedures. In the meantime, it is therefore becoming ever more important to review what options are available for each of your online accounts in order to ensure that your loved ones have the access you desire after your death. Without such foresight, not only may the job of your personal representatives prove to be significantly more challenging, but your loved ones may end up without access to data which you wanted them to have.

We recommend therefore that when reviewing your will (which you should do at least every five years, and also on major life events e.g. marriage or the birth of a child), you also make a list of all your online accounts and other assets, and consider the best way to pass on all such information after your death.

Guy is a Partner and Zahava an Associate, both in our Private Client team.

Making and updating a Will: a crucial estate planning tool

• 23 March 2021
• News

Making a Will is a vital part of any estate planning exercise. Sharing wealth with family and other loved ones in the most tax efficient way possible, is a priority for most people. Their aim is to provide for partners and ensure that children are supported financially to achieve their goals, whether those include buying a property, or starting a family or business.

Given this strong desire to share their wealth, it is concerning that nearly two thirds of adults in the UK do not have a valid Will in place. Statistically, a high proportion of these will continue to have no Will at their death. This means that their estates will be distributed to whichever family member stands in line to benefit under the intestacy rules, and with no choice of who acts as executor.

What happens if you don’t have a Will?

As an example, if someone dies intestate (without a will) leaving a spouse and children, the spouse will have the right to:

• Administer the estate.
• Inherit all the personal belongings.
• Inherit a legacy of £270,000 and one half of the remaining estate.

The balance of the estate will pass to the children in equal shares. This will rarely be the result that the deceased would have chosen.

In fact, dying intestate can be the catalyst for serious friction within a family that, in the worst cases, may end in litigation. Every family is different, with unique dynamics between family members that a Will can help to accommodate. A testator may be part of a cohabitating couple, or in a second marriage or civil partnership. There may be children or step-children (or both) with whom they may or may not get on. They may have adopted children or, increasingly, their children may have been born by way of surrogacy, which raises its own inheritance issues. Adult children or step-children, in turn, may be in difficult relationships with spouses, civil partners, boyfriends or girlfriends.

It is also worth noting that intestacy can have unfortunate inheritance tax consequences which it may be possible to mitigate with a Will.

Why make a Will?

Such complex relationships provide strong reasons for individuals to ensure they have a Will in place. However, even those with more straightforward family arrangements should make a Will to ensure that their spouse, civil partner or other partner, children and members of their wider family, receive the gifts and shares of their estate that they wish to leave, and that the people they wish to administer their estate are appointed to do so.

Many people also choose to appoint guardians for their children in their Wills. While this can be a good approach, choice of guardians can sometimes be one of the most difficult decisions for a couple to make. As such, it is important not to hold up signing a Will because this issue remains outstanding. Once guardians are chosen, a separate deed can be drawn up or a couple’s Wills can be updated, whether by making a new Will, or using a separate document, known as a Codicil, which is read as if it was part of the Will itself.

Life events and other reasons for updating a Will

There are many reasons for updating a Will. A testator’s choice of executors or guardians may be out of date. They may have changed their mind about legacies; who should benefit or how much they should receive.

There may be a statutory reason, for example, where trusts have been set up in a Will that now need to last into the grandchildren’s generation and beyond. Before April 2010, the fixed period a trust could last was limited to 80 years. This has been extended to 125 years, and Wills that pre-date this change should be changed to take advantage of the longer period.

Significant life events may affect the validity of an existing Will, or the nature of the legacies within it.

Marriage or civil partnership

Unless a Will is made expressly in contemplation of marriage or civil partnership, it will be revoked automatically on either of these events taking place. As such, couples getting married or entering into a civil partnership should ensure that they make new Wills or Codicils, either in advance, clearly stating their intention to marry or become civil partners, or as soon as possible following the ceremony.

The arrival of children

The arrival of children is an exciting, but incredibly busy time. However, it is obviously important to ensure that children are properly provided for in the event of a parent’s untimely death. Many Wills will already include gifts in favour of future children, but even if this is the case, it is important for parents to re-visit their Wills to ensure that such gifts continue to reflect their intentions.

Divorce, second marriages or civil partnerships and second families

Divorce or the dissolution of a civil partnership does not invalidate a Will, but instead the Will is read as if the former spouse or civil partner had pre-deceased the testator, and his or her estate passes accordingly. While this may be what the testator would want, that may not always be the case. In any event, it is a good idea to revisit the terms of a Will following a divorce.

Once again, any subsequent marriage or civil partnership will invalidate a pre-existing Will unless made in contemplation of this event, so individuals should review their Wills before, or as soon as possible after, getting married. This is particularly important, because consideration will be needed to ensure that legacies take account of any children (or grandchildren) of the previous marriage, as well as the needs of a new family.

Updates to take account of legal changes

Transferable nil rate band: Changes to the law made in October 2007 mean that it is no longer necessary to make specific provision in a Will for the use of the nil rate band (the value of a Testator’s estate which can pass tax-free to any beneficiary, currently £325,000)). This band is now transferable to the estate of the surviving spouse or civil partner in the event that it is not fully utilised on the death of the first to die. When updating their Will, testators may choose to remove a nil rate band trust or other gift where one is included, in favour of a different type of legacy.

Residential nil rate band: Another, more recent, nil rate band-related change applies to estates that include a residential property that has been the main residence of the deceased. If this passes to a child or other direct descendant of the deceased, an additional £175,000 “residential nil rate band” may be available (£350,000 if the transferable nil rate band from the other spouse is available). There is a tapering of the relief for estates with a value over £2 million, so this nil rate band will not be available in all circumstances.

In most Wills, such a property would be left to a spouse and then to children, or to children directly. However, where this is not the case, testators may wish to revisit their Wills to take advantage of the residential nil rate band where it is available.

Trusts – discretionary or life interest: Historically, Wills often included a life interest trust, initially naming the surviving spouse as the life tenant (who would be entitled to the income of the trust during their lifetime) and then for children and grand-children.

More recently, following changes made in 2006, such trusts have fewer tax advantages than in the past over discretionary trusts, at least once the surviving spouse or civil partner has died. Consequently, many more Wills nowadays for testators with a significant asset base, are set up as a flexible discretionary trust, rather than a life interest trust. The discretionary trust will name the close family members who are to benefit and will often include a power given to the trustees to add further beneficiaries at a later date.

The precise wishes of the testator are set out in an accompanying (but non-binding) side letter just as they can be with a life interest trust. The letter can say whatever the testator wishes in his or her own style. It has no specific legal format and can be updated by the testator at any time to take account of changes in circumstances and without going through the formalities of preparing a new Will.

Such a format provides significant flexibility. Testators can provide guidance to the trustees as to how their property should be distributed, or how their business should be run, and by whom. At the same time, the trustees are not bound by these wishes, as they would be by clauses in a Will, and can adapt them to take account of different scenarios as they arise. For example, if a potential beneficiary is in a difficult relationship, or is likely to be divorced, the trustees will be able to monitor how and whether he or she receives income or capital, and consider how best to avoid an inheritance falling within a financial settlement.

Where a discretionary Will is not the solution

A discretionary Will may not suit every situation. A couple may prefer more clarity, perhaps because theirs is a second marriage for one or both of them, or they are troubled by the non-binding nature of the side letter. However, where a Will contains a trust, whether it is discretionary or includes a life interest, testators should consider carefully the level of freedom they want to give their executors, trustees and guardians (where relevant) as the ultimate decision-makers.

International considerations

Additional considerations apply to individuals with international connections. Anyone who is resident outside England and Wales, but who owns property in this country, or who is resident here with property abroad, should take advice on how best to ensure a smooth succession to their assets wherever they are located.

The domicile of the individual concerned may also be relevant. Under the general law of England and Wales, the place where an adult is domiciled may vary during their lifetime. It will depend on whether they retain their domicile of origin (generally where their father was domiciled at the time of their birth) or have acquired a different domicile of choice (the place where they intend to live permanently or indefinitely).

This may be relevant in the context of succession to their estate because under the law of England and Wales, the law of the place where property is situated governs the distribution of immovable property (e.g. their residence or commercial property). On the other hand, an individual’s movable property (e.g. cash, bank accounts, shares, works of art etc) passes according to the law of the individual’s domicile at death.

For this or other reasons, in some cases, it may be advisable for an individual to have more than one Will, each dealing with property in different jurisdictions. In addition to the legal issues, practically this may help to ensure that such property can be dealt with and distributed as quickly and efficiently as possible following their death.

If a testator has more than one Will, care must be taken to ensure that those made in different jurisdictions do not contradict, or even revoke, each other. It is also vital to ensure that the intended gifts can be made under the law of the relevant jurisdiction. Legal advice in each jurisdiction in which property is held should always be taken, whether a local Will is being made, or all property is to pass under a single Will.

Next steps

An up-to-date Will is essential to ensure that wealth is passed on in accordance with the testator’s wishes. Therefore, if there has been a change in personal or family circumstances, it is a good idea to review an existing Will or to arrange to make one (if there is not one already).

To find out more about Wills and consider the best way to proceed, please do get in touch with a member of our Private Wealth team.

Anthony Thompson is a Partner in the Private Client team.

A PDF copy of the article above is also available to download here.

Why is a family investment company a good way to pass on wealth?

• 22 March 2021
• News

In the past, if people wanted to pass wealth to their children (often prompted by the prospect of ultimately paying inheritance tax if they did not) they would use trusts, because then they could keep the assets under their control.

Over a decade ago the government made that no longer viable for most UK based individuals by:

• Imposing a charge of 20% when assets (over the first £325,000) are put into a trust.
• Making trusts subject to the highest income tax and capital gains tax rates.

For families with assets eligible for relief from inheritance tax – a trading business, a farm, or “risky” investments like AIM and EIS shares – trusts are still very useful, but not so for those holding traditional investments or cash.

Although this article is written from a UK perspective, family investment companies can be just as useful for international clients; a trust is not always the right vehicle, and not every family feels comfortable involving a professional trust company.

If, for whatever reason, a trust or a simple outright gift to children is not appropriate, what are the alternatives? Some years ago much was made of so-called family limited partnerships, and while they remain the right vehicle for some, they are appropriate only for those with at least £10 million to spare because of the financial regulations to which they are subject. Enter the family investment company.

What is a family investment company?

The parents create the company and fund it with cash. They are the directors and the holders of all the voting shares, and their children are given a non-voting share each. That means that if one of the children needs money, the parents can declare a dividend in his or her favour.

The parents are in complete control of the company, but they have reduced their taxable estates because their shares carry no economic rights, only voting rights. There is a further degree of protection because, while the children hold shares outright, the articles can from the outset prohibit the transfer of shares to anyone who is not a descendant of the parents.

In due course, when (for instance) the children are in secure relationships and sufficiently responsible, the parents can bring them onto the board and give them voting shares.

The parents have, therefore, reduced their taxable estates by shifting value to the children, but without handing over control.

Tax benefits

In addition, family investment companies are increasingly attractive thanks to their very favourable tax status:

• Funding the company carries no tax charge.
• When the company buys stocks, it pays 0.5% stamp duty exactly as individuals do.
• Currently, the company will pay only 19% on any profit it makes on the sale of underlying investments. Come 2023, that rate will be preserved for companies with profits below £50,000, while larger companies may pay up to 25%.
• When determining the company’s taxable profit, the investment manager’s fees are deductible.
• Dividends declared on almost any kind of underlying equities are tax-free in the company’s hands.
• If the company itself declares a dividend, the tax rate depends on the income of the recipient. In the example above, if the daughter is at university and therefore has no income, dividends of up to £14,500 can be paid to her tax-free (i.e. her dividend allowance of £2,000, plus her personal allowance of £12,500). The next £37,500 will attract only 7.5% tax.

Limitations

All of that makes family investment companies very appealing. To give the full picture, though:

• If the family are higher rate taxpayers and receive regular dividends from the company, they will be making little use of the benign tax environment the company offers: to the extent that income from the underlying investments flows immediately through to the family, it will be taxed exactly as if the investments were held directly.
• Although the company is not a one-way street, it can be expensive to undo. If the family wanted to get the assets back into their own hands, they would need to redeem their shares or wind up the company. Doing so would give rise to capital gains tax on the amount by which the shares had increased in value.

The example given above is a simple one, suitable for the family in question. No two families are the same, and for another a more complicated entity might be suitable.

How we can help

We have significant experience of creating these types of companies, from those for nuclear families, to those for extended families living in different parts of the world with professional advisers acting as trustee shareholders.

To find out if a family investment company is the right approach for passing on wealth to your family, please do get in touch.

Guy Abrahams is a Partner in the Private Client team.

A PDF copy of the article above is also available to download here.

How divorcing couples are affected by tax

• 28 February 2020
• News

For couples facing divorce, the tax consequences of their financial settlement are unlikely to be at the forefront of their minds.

This blog post was first published in the FT Adviser and can be accessed here.

Nevertheless, the implications of failing to take good tax advice can have a significant impact on a couple’s finances at a time at which they are likely to be under pressure anyway. Changes being made to aspects of the capital gains tax regime with effect from 6 April 2020 may also affect the tax analysis. Thus, anyone considering separation or divorce should seek tax advice as early as possible. Specialist advice should always be taken where one or other party is domiciled outside the UK.

Please note that we refer throughout this article to spouses, but all the issues touched on apply equally to civil partners.

Capital Gains Tax

The most significant tax consideration in the context of separation or divorce is likely to be a potential capital gains tax (CGT) liability when assets are sold or transferred from one spouse to the other as part of a financial settlement. For many couples, the marital home is likely to be the most valuable asset to be considered in a divorce, but other assets and investments, including second homes, may also be significant in any financial settlement.

Outright transfer between spouses

Timing is the key here.

Assets of all types that are transferred between spouses during a tax year in which they have lived together at some point, pass on a “no gain, no loss” basis, so the recipient spouse is treated as receiving the asset at the value at which the transferring spouse acquired the asset.

However, if such a transfer takes place in a tax year after the couple has formally separated, assets will be treated as passing at market value, and accordingly any gain in value since acquisition will be taxable on the transferring spouse, subject to any available relief. This is despite the fact that there may have been no financial consideration involved from which the tax might otherwise be paid.

As the CGT liability arises to the person disposing of the asset (the transferring spouse) one might argue that the recipient spouse has little interest in timing the transfer to avoid a CGT charge. However, it is generally in the interests of both spouses to minimise the tax payable in order to maximise the pool of funds available to be shared between them.

While tax will not be the only relevant issue, if it is possible to ensure that any transfer of assets between spouses is made in a tax year in which they have lived together, in most cases this is likely to be preferable. If not, then negotiations of any financial settlement should always take into account any prospective CGT liability of either or both spouses, in respect of transfers of assets between them.

Principal Private Residence Relief for the family home

In the case of a couple’s main residence, Principal Private Residence Relief (PPR) may be available to exempt any gain arising after the year of separation.

However, for PPR to apply to the full gain, any sale or transfer must take place within 18 months of the transferring spouse leaving the property and it ceasing to be their main residence. The 18-month period of absence will reduce to nine months with effect from 6 April 2020, which will make the timing even tighter to secure full PPR for the departing spouse.

This period of absence can be extended indefinitely under relevant CGT legislation if the disposal of the property is to the former spouse, and the following three conditions are satisfied:

• The transfer is made under an agreement between the spouses in connection with their permanent separation, divorce or dissolution, or under a court order;
• Throughout the period from the individual leaving the property to its transfer or sale, it continues to be the only or main residence of the other spouse; and
• The individual who left the property has not elected for another property to be their main residence for any part of that period. These will include a change to lettings relief, which in future will be available only to property owners living in a property while it is rented out.

The third condition is the one most likely to prove to be a stumbling block, as it will not always be advisable for the non-occupying spouse to forego PPR on any new main residence. There are a couple of other changes to the ancillary rules for PPR due to take effect from 6 April 2020 that may affect the tax analysis in certain circumstances in respect of any transfer of the family home.

A second proposed change aims to ensure that where a transfer takes place under the no gain no loss rule, the recipient spouse always inherits the full history of ownership of a property from a transferring spouse for the purposes of calculating PPR. As a result, in certain situations, full PPR could be claimed on a subsequent sale of a property by the recipient spouse, despite the fact that the property might, for example, have been a buy-to-let property for years in the transferring spouse’s hands. PPR is not available for transfers of second homes, and the only relief from CGT in this case, or in respect of other non-business assets, would be the individual’s annual exemption (£12,000 in tax year 2019/20), if available.

Deferred trust of land

Courts do not always order an outright sale or transfer of the family home.

Instead a “Mesher” or “Martin” order may be made, whereby the property is held in both parties’ joint names on trust until a specified event occurs, for example (in the case of the former) the youngest child reaching 18 or leaving education. Until that point, the occupying spouse has the right to reside in the property.

For tax purposes, the two spouses are regarded as making a disposal into trust at the date of the court order in respect of which PPR is available. When the property is later sold, provided the conditions to extend the period of absence apply, PPR should be available to the non-occupying spouse, if he or she wishes to claim it, regardless of the period that may have elapsed since he or she left the property.

From an IHT perspective, the creation of a trust under either a Mesher or Martin order should have no immediate adverse effects provided it is entered into before the decree absolute or dissolution order.

However, IHT is discussed further below.

Deferred charge

A deferred charge differs from a Mesher or Martin order in that the property moves into, or remains, in the sole ownership of the occupying spouse.

The interest of the non-occupying spouse is represented by a charge over the property. This charge is enforceable on the occurrence of a specified event, again likely to be the youngest child reaching 18 or leaving education. The charge is either a percentage of the eventual sale price or a fixed sum.

Generally, a percentage is considered preferable in order to permit the non-occupying spouse to share in any increase in value of the property in the intervening period. The CGT analysis will vary according to the alternative chosen and tax advice should be taken before any decision is made.

Inheritance tax

For most couples, the inheritance tax (IHT) implications of divorce are limited, as any transfer of assets between them should be covered by the spouse exemption, provided it is made before decree absolute or a dissolution order.

Even after that event, transfers are likely to escape an IHT charge on the basis that they are not intended to confer gratuitous benefit, for example, because they take place as a result of a court order or compromise agreement between the parties. However, where an ongoing trust is created, including a deferred trust of land depending on its terms, there may be a risk of future IHT charges arising.

Therefore, it is important that IHT advice is always taken as part of any financial settlement. For couples where one spouse is UK domiciled and the other is not, the spouse exemption is limited to £325,000 (in tax year 2019/2020) for transfers from the UK domiciled spouse to the non-UK domiciled spouse.

Any sum transferred in excess of that amount will be treated as a “potentially exempt transfer” and will also be exempt from IHT provided the transferor spouse survives for seven years following a transfer. Taper relief is available to reduce IHT liability in respect of transfers made between three and seven years prior to the death of the transferor.

While the IHT implications of separation or divorce itself may be limited, once any financial settlement is finalised, both parties should take their own estate and tax planning advice to ensure that their wills and other financial arrangements are updated to reflect their new status and to be as tax-effective as possible.

Income Tax

As married couples are taxed separately on their income, the tax implications of divorce are generally limited to any income-producing assets that are transferred as part of the financial settlement. However, everyone’s circumstances vary, and it is important always to take advice.

Stamp duty land tax

Stamp Duty Land Tax may be payable on transactions involving land, including the purchase of a residential property.

Transactions in connection with divorce or dissolution of civil partnerships and made in pursuance of a court order of divorce, dissolution or separation are generally exempt from SDLT. This would include transfers of the family home between spouses.

However, SDLT will be payable on acquisition of any new residential property, for example if the non-occupying spouse decides to buy a new property in which to live. In normal circumstances, the acquisition of a property (or “dwelling”) while also retaining an interest in another one (for example, in the family home) would give rise to an additional SDLT charge at the rate of 3 per cent of the value of the property.

This charge would be payable in addition to the standard rates of SDLT. However, where a couple is getting a divorce, a spouse who owns an interest in a dwelling in respect of which a property adjustment order has been made for the benefit of another person is not treated as owning that interest for the purposes of the additional charge, provided that the dwelling is not his or her main residence, but it is the other person’s main residence.

Conclusion

This article has touched on some of the most common tax considerations for couples considering separation, divorce or dissolution of a civil partnership, and while not exhaustive, this should illustrate the vital importance of taking tax advice at the earliest opportunity in order to ensure that adverse tax consequences are avoided or mitigated as far as possible.

Simon is a partner in the Family team and Guy is a partner in the Private Client team at Forsters

You may also be interested in

• How to split the pension on divorce