Tax & Estate planning: Four basic steps for everyone

Agriculture is facing seismic changes at present, causing many farmers to review their affairs and consider their options with regards to estate planning. This article explores some basic strategies.

Putting in place a Will

Making a Will is a crucial element of estate planning.  A Will enables a rural property or business owner to ensure that, on death, the property owned by them (their estate) is distributed according to their wishes in a tax-efficient manner. 

For farming families, for whom handing down assets in a way that preserves the continuity of the business is a priority, a correctly drawn (and regularly reviewed) Will is vital.

Without a Will, the statutory intestacy provisions apply which may result in an estate passing in a manner, which neither fulfils the owner's wishes, nor maximises the tax-saving possibilities built into the legislation.  Chief amongst these tax reliefs – from a farming perspective – are agricultural property relief and business property relief; ensuring that the conditions of these reliefs are utilised as fully as possible is an important part of the Will drafting and general estate planning process.

Finally, a Will enables a property owner to choose suitable, competent executors to administrate their estate. This simplifies the administration process, thereby saving time and expense, to which an intestacy invariably gives rise.

Lasting Power of Attorney

Lasting Powers of Attorney (LPAs) allow the appointment of "attorneys" to make decisions on behalf of a property and/or business owner in the event of them becoming incapable of making decisions during their lifetime. 

There are two types of LPA: one covering property and financial affairs, and another covering health and care. In both cases, attorneys should be a person or people that are trusted by the person making the appointment to make important decisions about their life, such as a family member, a close friend or a professional adviser.

LPAs can only be used once they have been registered with the Office of the Public Guardian.  Once registered, a property and financial affairs LPA allows attorneys to make decisions, which the person appointing the attorney might be unable to make, such as operating a bank account, paying bills, and buying or selling property. 

A health and welfare LPA – which can only be used once capacity has been lost – enables attorneys to make decisions about the type of care and medical treatment required, including life-sustaining treatment (if this is specifically permitted in the LPA), and daily matters such as diet.

Inevitably, the importance of having an LPA in place increases with the risk of mental incapacity, e.g. as an individual ages, or becomes ill.  For farming families which have a business to run, the importance of appointing appropriate attorneys, who can step into their shoes with regards to the business if necessary, cannot be underestimated.

Life assurance

Where an inheritance tax (IHT) liability is anticipated on death, consideration should always be given to funding the tax by a whole life insurance policy (written either on a single life or a joint life last survivor basis) held in trust for the next generation.

Current best practice is for the person taking out the life insurance policy to declare that it is held on trust for the intended beneficiary or beneficiaries, so that, on death, the proceeds are not amalgamated with that person's estate for IHT purposes.  Furthermore, an appropriate trust can allow a greater degree of control over the destination of the proceeds (rather than an outright assignment), so that the settlor can ensure they are applied for the intended purpose.  One such purpose could be to provide for any non-farming family members.

A recent report by the Office of Tax Simplification recommended that such policies should automatically be outside a person's estate for IHT purpose, whether or not they have been written in trust.  However, this change has not yet been implemented and it is therefore important that the correct trust structure is put in place.

Pensions

Although typically thought of as providing an income in retirement, a pension can also be a useful tax planning tool, or a means of providing for the family on death.  

Where pensions pay out on the death of the holder, it is important that a death benefit nomination form is in place.  It should be reviewed frequently and a new form should be completed on the death of a potential beneficiary to ensure there is always a valid form on file. If there is no indication of who the scheme administrator should pay the benefits to, the available options will be restricted and this could have unintended tax consequences.