Succession planning is often a sensitive topic for wealthy individuals at the best of times, but as the world’s wealthy become progressively more international, conflicts in cross-border legislation can make the process seem like an insurmountable task. John Schaffer investigates how well the UK and European wealthy are prepared for the transfer of their wealth
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There are numerous issues involved in succession planning that can often cause wealthy individuals to stall plans for the transfer of their wealth to the next generation. Wealthy individuals in the UK and Europe are often faced with challenging inheritance tax (IHT) legislations and complex systems that can deter them from implementing proper provisions.
High net worth individuals (HNWIs) are becoming increasingly globalised and face the challenge of having assets in multiple jurisdictions, causing further difficulty as they battle through a minefield of cross-border laws that frequently contradict one another.
A recent EU directive (Brussels IV) has attempted to make succession planning in cross-border situations more transparent; however succession plans are often a bespoke affair when it comes to the wealthy and individuals need to work closely with advisors to make the process as painless as possible.
Caroline Garnham, CEO at Family BHive, an exclusive online community for wealthy clients and advisers, tells PBI that she has been "really shocked" by the lack of preparation for succession planning amongst the UK’s wealthy.
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By GlobalData"We’re talking about people with hundreds of millions of pounds who have inadequate arrangements. Any arrangements that I have seen are leaving huge holes and gaps, which is quite surprising."
Garnham adds that many UK advisors suggest that clients transfer their wealth to successors seven years before their deaths in order to mitigate against IHT charges. However, she points out that this strategy can be a risk in itself. "It’s all very well but you don’t know when you’re going to die so when should the seven years begin?"
Michael Pagliari, partner at investment management, tax and accountancy firm Smith & Williamson, also has concerns as he says that although wealthy individuals are "mulling" succession plans over, "less than half of them have even started the process" in his estimate.
The subject of mortality is not a favourable topic for anyone. However, a well thought out succession plan is paramount for a wealthy individual, especially when the process can be long drawn.
Guy Simonius, managing director of wealth and tax planning at Julius Baer, suggests that building a plan for individuals who have assets spread across different countries can take between three and five years in particularly complex instances.
Julius Baer has a specialised department of approximately 100 people who work on succession planning. Simonius feels that, due to the Switzerland-headquartered bank’s global focus, it can offer a unique service to the international wealthy.
"There are points where a local lawyer who is not so much internationally specialised might have less experience, that’s where we step in." Simonius tells PBI.
Even when wealthy individuals have made succession plans, the need for regular review is key. Barry Adamson, partner at Berkeley Law, suggests that individuals should revisit their wills every five years due to frequent changes in legislation. He tells PBI:
"If you think about emigrating or if you have additions to the family, it is important that you keep your will under review because what is relevant and appropriate at the time the will was made may cease to be so in the future.
"I’ve seen wills from back in the 1970s, for example, which made perfect sense at the time, but can cause a lot of problems because they just haven’t been kept under review. Or, for example, they’ve been revoked because someone got married and hasn’t realised that the marriage would revoke it."
Self-made vs multi-generational wealthy
David Kilshaw, private client partner at EY, suggests that although it is also well known that many clients "don’t have wills", the predicament is less stark for ultra wealthy individuals as many of their succession plans are dealt with through trusts (in the UK) and foundations (in Europe), therefore limiting the need for a will for successful wealth transfer.
Trusts and foundations are certainly provisions for succession planning that are associated with wealthy individuals, especially if they belong to multi-generational families.
Kilshaw suggests that trusts and foundations are often heavily integrated into European multi-generational families.
However, according to Kilshaw, creation of new trusts in the UK has become less commonplace and problematic as individuals "get a 20% tax charge going in". He further adds, "If an entrepreneur is in their 30s or 40s, they probably won’t have a trust."
UK vs. EU succession
The significant differences between succession laws in the UK and the majority of European countries are due to the UK’s common law jurisdiction vs Europe’s civil.
In Europe, many countries invoke a policy of forced heirship whereby the next of kin are entitled to a significant portion of the deceased’s estate. In some jurisdictions this can be as large as 75% of the estate, leaving an individual with little choice as to whom to transfer their wealth to.
Forced heirship rules can become problematic when individuals have properties in multiple European jurisdictions as there can be confusion as to which country’s law applies at the time of transfer.
In response to the cross-border confusion, EU’s succession directive Brussels IV, applied on 17 August 2015, allows individuals to stipulate whether succession law applies in the jurisdiction where the assets are held or the country where they are domicilied. The EU regulation comes as an attempt to streamline the law across Europe.
The UK, Ireland and Denmark have chosen to opt out of the new legislation. Individuals in the UK and Ireland can, for the most part, leave their wealth to whoever they wish. But this is not the case in Denmark as forced heirship rules apply in the jurisdiction.
However, the new legislation could have significant implications on succession plans. Julius Baer’s Simonius says:
"Brussels IV is going to have a huge impact. It’s the first time where the law is defined a little bit. Normally international law is not coordinated and laws of individual jurisdictions can conflict with each other."
However, Simonius adds that many advisors are not fully informed on the intricacies of the new legislation and that it will take a few years until the changes are fully recognised.
Berkeley Law’s Adamson says that although the new legislation is "laudable", there are a number of issues that still need to be clarified.
