As clients become increasingly global and sophisticated in their asset base, the issues that advisers must consider become ever more complex, write Caroline Miller and Clare Armitage.
The digital era in which we now find ourselves also presents challenges as the speed at which new enterprises arrive often far outpaces legislation in this area. As professional advisers, we need to be alert to the issues these complexities present to ensure our clients are well protected.
Take, for example, an entrepreneur client who has already built up considerable wealth from previous successful businesses. They want both to enjoy some of their new found wealth, as well as protect it longer-term for their family. They have recently bought a villa on the Amalfi coast and, on the advice of a friend, invested £100,000 into cryptocurrency. This scenario poses several issues for an adviser to consider.
The intangibility of cryptocurrency and lack of any obvious parallel has left advisers – not to mention HMRC – in catch-up mode, trying to determine what and how this asset should be taxed. HMRC is taking the view that cryptocurrency will generally be taxed as a capital investment unless there is trading activity – for example, ‘mining’.
From a practical perspective too, digital assets can be overlooked in a client’s estate planning. This can lead to complications – as was demonstrated recently with the unexpected death of Gerald Cotton, the CEO of QuadrigaCX, a majorCanadian cryptocurrency exchange. He was the only person with the cryptographic keys to access $137m (£106m) of cryptocurrencies that had been kept in ‘cold storage wallets’ in his personal laptop.
If a client holds cryptocurrency, it is essential to leave details of the relevant ewallet private key code as otherwise it may be impossible to access this asset on death. Some organisations are now offering secure key storage, but details could also be left securely with the client’s will.
More generally, clients should, at a minimum, be encouraged to prepare an inventory of their digital assets, including cryptocurrency, computing devices and cloud accounts so that executors can identify the extent of the digital estate and deal with transfer of the assets where possible.
Note, however, that it can be a criminal offence under the Computer Misuse Act 1990 to use an asset holder’s password details to access their digital assets without the authority of the service provider, so executors need to tread carefully in this area and take advice. In more complex cases, it may be advisable to appoint so-called ‘digital estate executors’, who have the expertise to administer these assets.
While the UK has not opted into the EU Succession Regulation, a UK national can still include EU assets within the ambit of their English will and make a binding election under the regulation for the law of England and Wales to apply to their EU assets, thereby avoiding forced heirship rules that may apply in that jurisdiction and thus a premature UK inheritance tax (IHT) liability.
Advisers need to be mindful of the existence of any matrimonial property regimes as these can operate so that certain assets pass outside succession laws of the deceased’s estate and the scope of any will altogether. The content of any matrimonial property agreement, its applicable law and whether it has been registered should all be checked.
New EU Regulations – for marriages and civil partnerships concluded or changes made to existing regimes – came into effect from 29 January 2019 which, like the EU Succession Regulation, aim to harmonise the different matrimonial property regimes across the EU.
When advising clients with EU assets, it is now necessary to consider more than the laws of the country in which they, or one of them, are nationals or may presently reside. Parts of their estates could be subject to the law of a regime where the couple first lived during their marriage – even if some time ago. Both the EU Succession Regulation and Matrimonial Property Regulations will continue to be applicable to UK nationals with EU assets post-Brexit.
Where a client wishes to provide for longer-term succession planning, an increasingly popular method for more business-minded clients is to create a family investment company (FIC). Having wealth managed under a corporate structure can be more tax-efficient and familiar than trusts or other successionplanning models.
The purpose of an FIC is to separate ‘control’ rights from ‘economic’ rights and they are particularly useful where a client wishes to transfer value to their family, but retain control during their lifetime (typically via remaining on the board).
The FIC can hold interests in the client’s business or more general family assets and is usually structured with different classes of shares so that value is taken out of the client’s estate for IHT purposes and wealth can be passed down in a ‘dynastic’ manner. As with any corporate or estate-planning structure, having well-drafted governance and objectives are essential.
The article was originally published by the Professional Adviser, on 29 April 2019. (£)
On 14 May Caroline and Clare will be hosting a seminar exploring the issues raised by this article. To register please contact the Wedlake Bell events team on: events@wedlakebell.com.