Building a tax-efficient, family-friendly succession plan

Putting a succession plan in place not only allows an individual to pass on their assets in the most tax-efficient manner but also ensures fractures do not occur in a family, post death.

There are many ways to pass assets on to successors so it is vital to not only put a plan in place, but to continually reassess circumstances, as these can change over time.

"It's important that it is not just a fire and forget plan. It's fluid and evolves over time," Andrew Fahy from investment firm Brewin Dolphin says.

“In the past people were less happy to talk about these things or comfortable but they are now engaging with their wealth managers and want to have conversations about these things. People are more receptive to the idea of having a plan and communication within families is vital.

It's important to note that there is more choice through passing on assets prior to death

“On the flip side, if you don’t put a plan in place, you’re setting yourself up for nasty surprises. Things like tax that could be avoided legitimately as well as fractures within families if what’s envisaged isn’t communicated upfront,” he says.

A good plan or the right plan depends on each family’s circumstances but the range of savings that can be made through tax exemptions can be sizeable.

“An obvious one would be to exploit the 3k small gift exemption. It doesn’t sound like a lot in the context of a family’s overall wealth but if you think about it on a per person basis it could be a big saving,” he says.

It’s important to note that there is more choice through passing on assets prior to death, Emma Heron, says Partner with Law Firm Whitney Moore.

“There are tax reliefs for farmers, business owners and on dwellings and during your lifetime you can control it more than you can after your death. For agricultural relief to apply the person receiving it has to fall under the definition of a farmer; then they can receive relief of up to 90 per cent . But to qualify for that the beneficiary must have farming assets in their own name. That gives the person time to prepare for that. The same applies in business,” she says.

Without a will or a carefully laid out succession plan, this can cause major difficulties within a family

There is also a relief that allows a parent to pass on a family home to their child, entirely tax free, but again calls for clever planning.

“The person receiving the property has to have lived in it for three years prior to receiving it and must have no legal interest in any other property at the time of receiving it. Take for example a home that cost €1 million euro, the beneficiary would be paying tax of 33 per cent on about €680K of that, so that would work out at nearly €250K in tax,” she says.

Retaining control

Meanwhile, when it comes to a family company not every family member is a part of the business but the person or persons that are often assume it is coming to them. “Without a will or a carefully laid out succession plan, this can cause major difficulties within a family,” Heron says.

Many parents will consider the point in growing an asset in their own name if it is going to make inheritance tax a bigger problem down the line.

“Something worth €100 today might be worth double in a couple of decades. If they don’t need it today, why would they not move it on to kids now and allow them to enjoy growth in their own name,” Fahy says.

However the situation is nuanced; parents may not want to give up full control of an asset.

“People may ask, ‘what if I don’t want my kids to sell the asset and head off to Ibiza, what do I do then’? There are mechanisms where you can transfer assets but also retain control over it. That way you get the best of both worlds – the economic value moves to the next generation but control remains with the current generation. It’s a neat solution and is becoming more common,” he says.

Succession planning is also a useful tool to educate the next generation on how to be prudent with investment.

“This is a good recipe for protecting and growing family wealth into the future and is something we are keen to promote at Brewin Dolphin,” Fahy concludes.