Asset protection is essentially about planning now to protect for later.
Without planning, your assets are likely to be at risk of exposure to a number of financial predators. This could be as a result of commercial creditors, bankruptcy, divorce or the tax man.
So while the value of your assets will always be subject to economic fluctuations and commercial influences, you can in most cases take protective steps to shelter your assets from these financial predators.
What does asset protection do in reality? Just as there are many and varied needs for asset protection, so there are a plethora of tools available. Your choice will require careful consideration to ensure you are effectively mitigating risk while at the same time remaining compliant with current tax and other regulatory rules.
For example, you may want to hold assets through a structure to shelter your wealth from inheritance tax.
Businesses often look to hold family shares on a trust to protect them from their children entering into a marriage that doesn’t last.
Property developers might look to use structures that will ensure future ventures are kept discrete from completed developments in respect of which legal claims might potentially arise.
What does asset protection do to minimise financial risk?
Any asset protection strategy should take account of a range of potential risks, from the inevitable and foreseeable through to the unexpected.
Some of the most common threats include:
- Inheritance tax
- Capital gains tax
- Professional negligence claims
With these in mind, there are a number of steps to take for an effective approach to asset protection.
Start with a clear vision of your financial and personal objectives. These are the key drivers. Until you are clear what you want to happen, planning is likely to be limited in its effectiveness.
There may be many areas to consider here:
- What does your asset portfolio look like – both the type of assets and where they are?
- How easily do you need access to wealth and capital now?
- What is your current tax liability?
- What do you want to happen to funds payable – who do you want to benefit and how?
Your options for tax planning should be determined by your goals and longer-term ambitions for the structure. Whether that means use of one or a combination of structures, or making transfers between structures (Capital Gains Tax and IHT implications considered).
To meet your objectives and ensure protection across your asset portfolio and full net worth, your tax planning may encompass a number of tools that take advantage of tax reliefs, exemptions and deferred liability.
For protection purposes, trusts can offer certainty and shelter from financial attack.
Trusts are almost always used as a means of making a gift of cash or assets – including shares in the family business – with certain conditions applied that are important to the asset owner. For example, giving someone dividends on shares while retaining ownership of the underlying shares.
In other words – a gift with strings attached.
You can be a trustee of the trust that you have created, and so are able to control the transfer of your asset during your lifetime with protection from threats such as divorce and bankruptcy.
Placing an asset in trust offers IHT protection where you survive for the period of seven years and assuming that you do not derive a benefit from the asset(s).
One must also consider the capital gains tax implications of any asset transferred to the trust. Even where there is no consideration paid by the trust for the asset then this will be an event for CGT purposes.
Where the asset stands at a gain then in some circumstances the gain can often be deferred (or ‘held over’).
A will is arguably the most basic – and obvious – of planning tools. Making a will is the most effective method of protecting your assets upon death.
If you die intestate, you are exposing your estate and beneficiaries to all manner of risks. Your assets will be subject to the intestacy rules, meaning they will be transferred by a mechanical set of rules that are potentially not in line with your actual wishes. This may result in a contentious probate scenario following your death. Not a good result.
Family investment companies
Family investment companies (FICs) offer a number of benefits, but are unlikely to be suitable in all scenarios.
An FIC is a UK limited company where family members are the shareholders. FICs enable shareholders to transfer cash into the company tax-free.
Gifting shares is IHT exempt as a Potentially Exempt Transfer (PET) – provided the donor does not pass away within seven years of making the gift.
FICs can be very effective where the underlying investments are equities as the Company will not pay tax on the receipt of dividend income.
What might be disadvantageous, however, is the potential for double taxation on other asset classes that are not so exempt. In other words, there will be tax at the corporate level and then on any funds taken personally by shareholders / directors.
You will need to consider the specific impact of corporation tax on profits, income tax on distribution to shareholders, and the potential for capital gains tax liability on the disposal (transfer) of non-cash assets.
It should be said that FICs are particularly unsuitable where one is wishing to transfer property assets as there is likely to be a material stamp duty charge on doing this.
Gifts and transfers
Consider making the most of IHT-exempt gifts and transfers. A lifetime gift for example can be put on trust. This would be both tax-efficient for IHT purposes and allows the giftor an element of control over the gift and the release of capital.
Overseas pension schemes – QNUPs and QROPs
QNUPs and QROPs are, even by usual tax standards, complex schemes, and we advocate seeking professional advice to ascertain both suitability to your circumstances and on eventual use of the scheme(s).
Qualifying Recognised Overseas Pension Schemes (QROPS) are not liable to UK IHT. Anyone with a UK pension scheme who now lives overseas as an expatriate, or is planning to leave the UK, can transfer their existing pension provisions into a QROPS. Note in most other circumstances, there will be a 25% tax charge on the transfer.
Qualifying Non-UK Pension Schemes (QNUPS) are a flexible structure for funds not currently in a pension scheme. They can be particularly useful for UK-situate property and benefit from an IHT exemption in appropriate circumstances.
Advice on asset protection
Successive rule changes have rendered trusts unsuitable in many scenarios. As such, alternative structures should be considered.
Once you have an asset protection plan in place, it will be prudent to carry out some form of review, ideally at least every 2 years.
Take professional advice on asset protection to separate and protect your portfolio of assets from external financial threats.