Getting married? Protect your family business with a pre-nup

Posted on By Joanna Pegum
couple walking

You’re getting married! Congratulations! This is an exciting time for you and your partner. In the whirlwind of excitement, practical considerations such as a pre-nup are often far from your mind. But if you own all or part of a family business, or you expect to inherit shares in a family business, then it is important to plan for all eventualities – one of which is the possibility (however unlikely ) that your marriage or civil partnership might not last.

What happens to business assets on divorce?

The starting point for the division of assets on divorce or dissolution is an equal division, and this might include a share of the business, which could cause issues for its survival.

It is subject to the discretion of the court as to whether there should be a departure from equality. Under the Matrimonial Causes Act 1973 the court will consider a range of factors when exercising its discretion as to how assets should be divided including: each party’s financial needs and resources, length of marriage, age of the parties and standard of living.

In cases involving family businesses, there is no certainty that the business will be ‘ring-fenced’ from the division of assets. The court will consider whether the business is matrimonial property and therefore whether it forms part of the matrimonial pot.

Is a pre-nuptial agreement binding?

While a pre-nuptial agreement is not automatically legally binding in England and Wales, it will be one of the factors taken into account in the court’s discretionary approach. The decision in the case of Radmacher v Granatino [2010] UKSC 42 found that more weight can be attached to a pre-nuptial agreement provided it is freely entered into by each party, with a full appreciation of its implications.

Therefore it is likely that the court will uphold a pre-nuptial agreement if the following elements have been met:

  1. Both parties obtained independent legal advice prior to entering into the agreement.
  2. Both parties entered into the agreement freely without any pressure or undue influence and the agreement was executed at least 28 days before the marriage/ civil partnership.
  3. Prior to entering into the agreement both parties provided the other with full financial disclosure.
  4. Both parties understood the implications of the pre-nuptial agreement.
  5. The agreement was validly executed as a deed.

When considering whether a pre-nuptial agreement is fair, the court will also consider whether there have been any unforeseen changes in the parties’ circumstances that may render the pre-nuptial agreement unfair; or whether the agreement would prejudice the needs of any children of the family. It is unlikely that the court will uphold a pre-nuptial agreement that is inherently unfair to either party or any children.

Provided that the court is satisfied that a pre-nuptial agreement follows the above criteria, it can provide protection for individuals with family businesses by ensuring the business interest remains within the family. It will provide clarity for each party at the outset of the marriage or civil partnership about which assets are intended to form part of the matrimonial finances, and allow parties to plan what will happen in the event of divorce or dissolution. It may also help to alleviate the possibility of contested financial proceedings upon the breakdown of a marriage or civil partnership, which can be a stressful and expensive process.

Seek advice

Everyone’s situation is different. Before embarking on any course of action, you should speak to a qualified advisor with expertise in issues relating to family businesses.

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Amanda Simmonds TEP, Senior Associate, Private Client, Lupton Fawcett, Leeds.

Probate v confirmation: a comparison of the English and Scottish procedures for executors

Posted on By Joanna Pegum
train leaving Scotland for England

If you are the executor for a friend or relative’s estate, there are some substantial differences to consider, depending whether the estate is in England or Scotland.

The differences reflect the different legal traditions in the two jurisdictions – common law in England, which originated in the Ecclesiastical courts of the Middle Ages, and civil law in Scotland.

Different terms are used

Different terms are also used. The document the court issues for the executors is called probate in England where there is a will; and confirmation in Scotland, whether or not there is a will.

In Scotland, the person who handles the estate is always called an executor. If they are appointed in a will, they are an executor nominate; where there is no will, an executor dative; but both kinds of executor need to seek a grant of confirmation.

Sometimes the Scottish and English terms are different even though they are describing essentially the same thing. The English say real and personal property, while the Scots say heritable and moveable; the English say life interest and remainder, while the Scots say liferent and fee; and the English say administration of estates, while the Scots say executry administration.

What are the real differences?

In England, probate tells the world that the executors named in it are entitled to deal with the assets of the estate because they are named in the will.

In Scotland, confirmation effectively transfers the estate assets to the executors so they can administer them, subject to the terms of the will. Scottish executors step into the shoes of the deceased person (in a legal sense), and they (and only they) can deal with the person’s assets and enforce their rights, for example calling in any debts the estate is owed.

When executors in Scotland apply for confirmation, which uses a form called C1, they must include a complete list of the deceased’s assets in the UK, together with their values. Along with the will, this becomes a public document when lodged in court.

This is not required in England, where the only information that is public is the total value of the estate, both gross and net.

In Scotland, the Sheriff Court issues confirmation, which is a copy of Form C1 with the court order attached to it. The court issues certificates of confirmation so executors can send the confirmation to all asset holders simultaneously. Unlike the office copies of probate, issued in England, these are specific to each asset, and include a description and value as stated in Form C1.

Both probate and confirmation were well established long before estate duty (or inheritance tax) was introduced, and they double up as a tax return for the estate assets.

What happens if other assets are discovered later on?

In England, a person or organisation receiving an office copy of probate has no way of knowing how the gross value of the estate was made up, or what value was given for their asset. Because of this, English executors can deal relatively easily with additional assets that may come to light later, though of course they are required to report them to HMRC where inheritance tax  is payable.

In Scotland, however, executors will usually need to apply to the court for an eik (a Scots word for an addition) or supplementary confirmation, which details the additional assets. Executors need to report all applications for an eik to HMRC before the Sheriff Court will accept them, even if no tax is payable and the original Form C1 did not have to go to HMRC.

Occasionally executors can deal with additional assets of lower value without the need for an eik, but they generally have to inform HMRC, and may be required to produce written evidence that they have done so.

Will this hold things up?

If English executors omit or undervalue an asset in the probate application and the inheritance tax form, which is known as IHT400, they will still be able to deal with the assets by producing the original grant of probate or an office copy.

Scottish executors who omit details of an asset will not be able to deal with it until they have told HMRC and obtained an eik to confirmation.

The Scottish requirement to include a list of all the estate assets in Form C1 makes it simpler in cases where inheritance tax needs to be paid. In England, the IHT400 and supplementary forms request exact details of the estate assets, and English executors have to complete all the forms in full.

As Scottish executors have already set out all the assets and values in Form C1, HMRC accepts inheritance tax returns which simply show the total value for each category of asset, and can refer to Form C1 for the detail.

Your advisor will be able to help you through this process.

Ian Macdonald TEP is Head of Private Client at Wright Johnston & Mackenzie, Glasgow.

I live in Europe but own assets in the UK. What will happen to my estate when I die?

Posted on By Joanna Pegum
woman at airport

Are you among the many British citizens who have retired to Spain or Portugal, but have kept your home or other assets in the UK? If so, it is important that you understand what will happen on your death.

All EU Member States, except the UK, Ireland and Denmark, apply the EU Succession Regulation, which governs cross-border or international successions of people who have died after 17 August 2015. As the UK is not bound by the Regulation, estates of British citizens who live in a Member State but hold assets in the UK may be more complex.

Which court will deal with my succession?

Under the Regulation, the court of the Member State in which you have your last ‘habitual residence’ will deal with your worldwide estate. This applies whether the assets are real estate or movable items.

Unfortunately, the Regulation does not define the concept of ‘last habitual residence’. To work this out, you need to assess your circumstances during the years leading up to your death. You’ll need to factor in how long and how often you stayed in each country, the reasons for your presence there, and where your ‘centre of interests’ is, which takes into account the full range of your social, domestic, financial, political and cultural links.

Since the Regulation does not apply in the UK, successions involving assets in a Member State as well as in the UK can give rise to problems, known as ’positive conflicts of jurisdiction’, meaning that the courts of both countries may want to deal with your succession. In order to limit this uncertainty, you should seek advice from an expert on the practical implications of the Regulation.

Which law will govern my succession?

As with the decisions as to what court deals with your succession, under the Regulation, the law of the country in which you have your last habitual residence will govern your entire succession.

If the law of a European country applies, this could also mean that some of your heirs will enjoy an enforceable right to a share of your estate, irrespective of what you may have specified in your will. This is known as ‘forced heirship’.

The Regulation does offer you another option, however. You can choose the law of your nationality (or one of your nationalities, if you hold several passports) to apply to your succession.

As this depends on your family circumstances, you should speak to an expert about making a choice of law to govern your succession.

David W Wilson TEP is a Partner/Attorney at Law at Schellenberg Wittmer in Geneva, Switzerland.

It’s never too soon to make a will

Posted on By admin
young man with cat

What have you got planned for later life? A cruise might be nice, or a cottage by the sea, but what about money? Do you know if you could afford a care home? Have you made a will? Do you know who would care for your family?

If your answers are no, you’re not alone. Apart from having a pension, research from savings organisation NS&I has shown that over half of us have not made any further financial plans.

More than a third haven’t made provision for long-term illness, nursing or care home fees, either for ourselves, or for other family members. Another third have thought about it – but haven’t put any plans into place.

Even such a basic step as making a will seems to elude most of us, even though almost everyone agrees it’s important.

Many people feel that they are too young to make a will, even those in the 45-64 age bracket.

It seems to be the big steps in life that finally prompt people to take action, notably getting married and having children.

However, it’s worth thinking of your family at every stage in life. If you die without making a will, they can be put under enormous strain trying to work out your wishes. They may face higher tax bills too.

If you don’t make a will, standard rules known as the intestacy rules will apply, and your estate could be divided up in ways you’d never have wanted.

For example, if you had been married and separated, but never got divorced, your ex-husband or wife would automatically benefit, even if you had spent many years with a new partner. If you had not married, but lived with a partner, your parents or siblings would inherit, and your partner may get nothing.

‘Many people assume their possessions will simply pass automatically to their partner or children, or believe their assets are too insignificant to need a formal arrangement’, says Emily Deane TEP from STEP.

‘But if you die without making a will, the intestacy rules will be applied, and this may not be what you want,’ she added. ‘The only certain way to ensure that your partner or relatives inherit in line with your wishes is by making a will.’

The donor’s dilemma

Posted on By admin
mother thinking of handing over house

If you are thinking about transferring your house to your children during your lifetime, you should first consider the seven Ds…

  1. Divorce

If any of your children were to divorce then there would be a risk, however remote, that any assets in their name, including your house, could be taken into account in the divorce settlement.

  1. Debt

In the event of any of your children getting seriously into debt or becoming bankrupt then there would be a risk, however remote, that their creditors may seek to force them to sell your dwelling-house in order to discharge the liability.

  1. Death

If any of your children were to die before you without making appropriate provision in their will in relation to your dwelling-house, then there is a risk that their share of your house would pass to an in-law. Indeed, the problem may be compounded if your son-in-law or daughter-in-law should subsequently remarry.

  1. Disagreement

You may subsequently want to sell your house and apply the sale proceeds to buy another house. There is a risk that your children will not agree with your request. In addition, there is a risk that your children may wish to sell your house without your agreement and seek to have you put out of your own home.

  1. Deliberate deprivation

Health Trusts/local authorities have rules against deliberate deprivation of assets. If it can be proved that you deliberately deprived yourself of an asset in order to get government help towards nursing home fees, then the value of your house could be clawed back from your children. There is no time limit on this, although the longer the period of time between your transferring ownership and going into a nursing home, the less likely it is that the transfer will be challenged.

  1. Deprivation feeling

It is very important that you should try and envisage how you would feel if you have given away ownership of your house and other assets to your children. Will you feel deprived? Will you feel out of control? Will this feeling cause you to lose sleep and wish you had not done it?

  1. Doubt

If you are in doubt about what you are doing, it is better to postpone any action until such time as you are sure.

A qualified advisor can talk you through your options, ensuring all angles have been considered.

Peter M Thompson TEP, Thompson Mitchell Solicitors, Portadown, Northern Ireland

How do I value my estate?

Posted on By admin
couple in town

One of the first questions you are asked when making a will or considering your inheritance tax liability is: ‘what is the value of your estate?’. Like many people, you may not have considered this before and so may be left wondering what your ‘estate’ actually consists of and how you are supposed to put a value on it.

To find out how much your estate is worth you need to calculate the value of your assets, then minus your liabilities.

Assets in your estate

Your home will almost certainly be your most valuable asset, so start with that. Then add in bank and building society accounts and personal possessions (car/household contents/jewellery, etc). If you are valuing your estate for inheritance tax purposes, use a professional to value any possession worth more than £500. For items worth less than that, HMRC (the UK tax office: HM Revenue and Customs) will accept an estimate.

You should also include:

  • Pensions (lump sums payable on death)
  • Life insurance policies
  • Stocks and shares
  • Bonds
  • Interest in other properties
  • Any money you are owed

Liabilities

Your liabilities consist of anything you owe. These include:

  • Mortgages
  • Loans
  • Credit cards
  • Overdraft
  • Any kind of debt

Assets – liabilities = estate value

Having worked out the value of your estate you are now able to figure out your inheritance tax liability. For information on this, read ‘How can I prepare for inheritance tax?’