Succession Planning

Jan 18, 2023

Introduction

Succession Planning might be:

  1. whilst in work but preparing for change. This might start with bringing in a second or further generation. A point mentioned later but the object of a different work
  2. as you prepare for retirement or handing over
  3. on retirement
  4. the forced change due to circumstances
  5. planning for that last journey and
  6. by your executors or trustees after your passing to comply with the law whilst carrying out your chosen wishes.

Full Article
This work is part of a full work in two Parts. Part 1 dealing with succession planning. Containing the annex which we use in succession planning so that clients can see the costs and advantages of anything which we suggest. Part 2 an equally large guidance on the main applicable taxes – capital gains tax and inheritance tax. In order to ensure that the tax amounts and guidelines are correct at the time of release. We keep the full content off the web so that we can ensure when released they are to the best of our knowledge up to date at the time of release. They are available on request at [email protected]

Ring Fencing
When considering or implementing a Succession Plan one is essentially attempting to protect and possibly enlarge the pot, then “ring fence” assets for you and your family. Perhaps in modern terms “geo-fence”. Whilst some cases mentioned below indicate how you might proceed safely. The majority are for reading and lessons to learn.

Cases in our Courts are mostly stories of mistake in ring fencing from which we can learn. Cases take.

  1. time
  2.  emotion
  3. legal cost, also
  4. as all senior cases tend to be reported available on the internet. The risk of each case is that your life and problems become public on the internet for the world to see.

There are no winners in Court, just one loses more than the other. Legal cases should be looked at that way.

Learning from others:

  1. There is an area of Equity or Chancery Law called “Proprietary Estoppel”. It can affect succession planning both lifetime and on death. I placed in May 2022 an article on the site I called “False or Broken Promises and Bad Partnerships”. Within that reference to “The Cinderella” case of Davies v. Davies [2017] 1 FLR 176, Habberfield v. H 2019 22 ITELR 96. All quite recent cases. All involving family unhappiness following decisions made by parents. It included a reference to what was then the most recent cases including Guest v. Guest. In it to the first instance, then Court of Appeal decisions. The Supreme Court later reported its decision in October this year under 2022 UKSC 27 or 2020 EWCA Civ 387. For the present it is an expensive area of law. Ensure you in your succession planning avoid but learn the lessons
  2. There is the Inheritance (Provision for Family and Dependents) Act 1975. Potential rights under this Act simply cannot be ignored although maybe often avoided, for example the problems behind Sargeant v. Sargeant [2018] EWHC 8 (Ch)
  3. The opposite of (i) and (ii) is perhaps sadder. Illustrated by the case of Ham v. Ham [2013] EWCA Civ 130 a Court of Appeal case which in 2016 returned to the High Court. So, a case in not just one but three parts; (a) first instance (b) Appeal Court and then back to (c) the High Court. It involved a 400 acre farm on the tip of Dartmoor with a large milking herd established by Mr and Mrs Ham senior over their working lives. In October 1997 they introduced their son into the partnership believing he would take over their farm on their succession. They had a traditional Partnership Deed which was signed with annual accounts also signed. However, in February 2009 their son had had enough and wanted a different life. That triggered an end of the partnership and with that he sought his share out of the partnership just at a time, when with his parents age, they could not afford. Nor was it as planned or believed by them when they admitted their son into partnership. There was no argument that son was entitled to something on leaving. The initial issue was whether that should be at the asset value within the accounts or the “open market” value which would be much more. This was viewed as open market value. But as Lord Halsham had said in Johnson v. Moreton [1980] AC 37 “to build up a herd of dairy cattle between whose conception and first lactation at least three years must elapse takes time and planning whilst to disperse the work of a lifetime of careful breeding is but the task of an afternoon by a qualified auctioneer”. Before the Court of Appeal, it was accepted that the son might gain a “windfall profit”. But a share of “capital and profit” in the accounts was not the same as owning the assets used by the partnership. Whilst still a blow to the parents the fact was the land had already been owned by the parents as was the herd when the partnership was first entered into. That being decided the case then turned as the Court was asked to consider open market on what? The fact the farm was mentioned in the accounts did not necessarily mean the farm was a jointly owned farm asset. The lesson is that whilst succession planning may well involve an introduction of the next generation into the business it is wise to include in any agreement and accounts a “Land Capital Account” in the names of those owning the land. They can then gift on death or earlier their individual assets. If they are to family on death APR and BPR should apply
  4. Within a business relationship or in a trust there are obligations called “fiduciary duties”. A person or organisation looking to operate with apparently discretionary powers often held in trust for another in circumstances. They may give rise to a relationship of trust and confidence. A recent example with a hint of the problems can be found in JSCM Bank v. Pugachev [2017] EWHC 2426 (Ch)
  5. When considering your succession planning you may want, and perhaps should have advice from your Accountant, Solicitor, IFA, trusted friend, or family member. You must recognise, as they may not, whether there is a “conflict of interest” in the delivery of any advice they may offer you. What can be a conflict is explained by Lord Hoffman in the House of Lords in Hilton v. Barker, Booth & Eastwood [2005] UKHL 8. Your advisor may not see the risk
  6. Succession planning often means tax changes. There is a line not to be crossed between “tax evasion” which is illegal and “tax avoidance” which is allowed, even if sometimes questions are raised by the Revenue. The established cases being Furniss v. Dawson [1982] and W.T. Ramsay Ltd v. IRC [1982]. Though for a more recent example see The Glasgow Rangers case RFC [2012] PLC (In Liquidation) formerly the Rangers Football Club and Advocate General of Scotland [2012] UKSC. Then, Barker v. Baxendale Walker Solicitors [2017] EWCA Civ 2056
  7. “False understandings” and false assumptions. In practice there are three immediately to mind:
    (a) the effect of ”taper relief”;
    (b) “open market value” so Duke of Buccleuch v. IRC [1967] (see below);
    (c) agricultural value and Lloyds TSB as PR’s of Antrobus v Inland Revenue [2002]
  8. All planning has consequences, some good some bad. Like an operation, some may involve immediate pain. It is important that the plan works for you and those around you. When it does not read Sargeant v. Sargeant (above).
  9. Lawyers often refer to two legal words in Latin “lex posterior” meaning where there are two rules one older the other more recent which seem to be at odds then the latest should be applied. Then “lex special” where some rules are standard and would usually be applicable but in certain circumstances there is a specific rule for that particular purpose. Then the specialist will apply [see Oxford]. This is one of those areas where both may apply.

Dovetailing
All succession should dovetail in conjunction with other decisions and plans including:

  1. a Lasting Power. Your succession planning may start in poor health. You might need to think about personal Attorney’s as opposed to professional Attorney’s. They may have different functions and require different skills
  2. you should be considering what is already set out up in your partnership, shareholders agreement and articles of your company’s association. It may be too late once you become ill
  3. the above may specifically affect assets, shares or cash within any Family Limited Partnership, Family Investment Company, or a similar vehicle
  4. when considering the above you need also to think in whose names your property is. Is there a Trust, or within your business and are any subject to that old bank guarantee you forgot about? That includes more than real estate. It could include your portfolio of stocks and shares, then
  5. your Will should also dovetail perhaps confirmed by a letter of wishes
  6. there may have already been exercised care and skill in setting up a lifetime succession plan. The risk is that the second without careful examination of the first may destroy that which is in operation [Luke 23.34].

The Numbers
With your plans Lawyers or Accountants should estimate for you:

  1. the effect off an immediate succession that day, with no change both on you and your family based on your gross and net assets and taxes arising
  2. the tax implications of any changes in your lifetime or you’re passing
  3. the likely cost of changes suggested based on your ideas (typically capital gains tax or SDLT)
  4. potential benefits.

Starting Points

  1. For the rural client, warning words include “actively farming”. Usually based on hours put in, “effectively retired” meaning business reliefs are lost [HMRC v. Executors of Atkins [2011] UKWT] “distributions to shareholders” meaning money which will be taxed. Then the special rules where they exist, for example, the herd basis of valuation, single/basic payment entitlements and profit averaging for farmers. The word farmer is used recognising the risks of being classed as a “hobby farmer” [Lloyds (P.R’s of Antrobus) v. STC [2002]
  2. For those in Scotland or Wales and considering a land transfer within the family, they have to consider what was once SDLT, what is now is the Finance Act 2016 a land and building transactions tax (they may not be the same).

Whether asset rich but cash poor or the opposite you should:

  1. protect your life partner and yourself first
  2. accept some tax is a consequence of life or when passing more sensible if at the right rate than a plan based only on tax avoidance

Comparing gross with net asset values against present income tax allowances is a fair start.

You should think about establishing your plan. It may not be you finishing it. Although a decision about the correct operation of a family trust. The Privy Council’s recent decision in Wen-Young Wong v. Grand View Private Trust Dec [2022] UPC 47 suggested six questions or points which Trustees might consider and follow. For the same reason the settlor might want to consider them when considering what he wants his successors to plan. As you may have passed before your Plan ends. The Privy Council’s good guidance to the very you might want to take in personally then with your lawyers when drafting being;

  1. “Central Importance” what are you truly seeking to achieve and as not all aim will be of equal importance to you, can you list them so your executors or trustees can follow?
  2. “The Substratum Rule” or behind the chosen words, what are the foundation or corner stones in your plan and can they be understood?
  3. “Overriding Principles” often so easy in a charitable trust as the principles are usually within the name. However, for the private trust what do you want as overriding principles or objectives your executors or trustees to follow?
  4.  “Acting within scope”. If you want or can allow your trustees to act, expressly authorise them to make you aims clear not just to them but also your intended beneficiaries if you can
  5. “Fraud on Powers”. Few trustees intend to commit a fraud. In most fraud cases the fraud alleged was a mistake. Think and set out the powers and obligations of your intended trustees
  6. “Proper Purpose Rule”. That will enable first your draftsman then your ultimate trustees or executors to follow the proper purpose rule and your executors to see why.

Not Got What You Are Looking For?
Our detailed client guide explains the tax regime together with how better to use for the rural client woodland, stables, taking in hand assets, lifetime gifts, pensions, let property, personal allowances, overseas property and assets and rather importantly taper relief. They are available by email free on request. Just contact us at [email protected]

Our assessment of current tax reliefs and understanding of the cases is no substitute for specific legal advice although the content of this article is copyright of Hassall Law.

16 January 2023