FOCUS ON LEGAL ADVICE


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Keeping a clear head is vital for prosperity in the long term


l In the current environment, businesses and individuals need to keep focused on the future


By Neil Evans W


ith financial markets in tur- moil amid the Coronavirus pandemic, most of Malcolm


Rust’s waking hours are spent reassuring clients. Whether this is in relation to the


effect of tumbling financial markets on their investment portfolios and pension funds, or the consequences of the public response to COVID-19 for their busi- ness, his core advice is the same: don’t panic. “We can’t deny we’re living in excep-


tional times,” says Rust, who is a partner at Shepherd and Wedderburn and head of its Private Client and Charities teams. “But what we need at the moment is a steely focus – faced with a crisis of this kind, people oſten don’t think clearly.” Te firm advises commercial, public


sector and private clients across a diverse range of sectors. Te events of recent months, with markets plunging dramatically because of the spread of coronavirus and a big fall in the oil price, have had an impact on every business and sector. One particular area of focus for Rust is


advising firms on their long-term strat- egy for wealth protection and growth. “One aspect I’ve been looking at with


a declining market is those businesses, say a high-net-worth family business, that were preparing themselves for sale before this happened,” says Rust. “Tey’ve had to call a halt on their plans and will need to start to rebuild their balance sheets when they can. “People planning for retirement,


maybe through a business exit, are in a particularly difficult situation. Tey don’t necessarily have a diversified stock market portfolio; perhaps all they have is their business, which they have sweated blood over to grow over the past 30-40 years. Tey might see their order book collapse or see the prospect of having to make a significant number of their staff redundant.” In these situations, Rust says, the most


important thing is to assist the client to ‘take back control’. Working in conjunc- tion with legal specialists across the firm, accountants and other advisers, Rust and his team talk clients through the options available. Tey discuss how the business is currently structured and what changes


could be made, what the cash flow projections are over the next few months – and further into the future – and stress test how the business would respond to various levels of decline in activity. Rust says: “By going through the


numbers and assessing the situation, individuals can find confidence.” While not financial advisers, Rust and


his team advise on the legal aspects of investment and assist others in assess- ing risk and the suitability of investment strategies for their clients. Extreme stock market volatility has wiped billions off the share prices of many companies – and the pension funds that invest in them. Douglas Sinclair, partner and Char-


tered Tax Adviser in the firm’s Private Client team, says that watching the FTSE plummet was an emotional experience and that he too is trying to support his clients through challenging times. “You can think ‘my investment is 10% less than when I went to bed.’ But it’s about trying to remind individuals why they’re investing,” he explained. “Usually inves- tors are on a timeline of 5-to-10 years (or longer), and oſten investing for income – so maybe their capital has gone down but the income ought to stay broadly the same. If you sell out now, the loss has been hard-wired in.” Others may be trying to benefit from


cheaper stock prices, and looking to get access to cash in the hope of making a quick return. Again, the advice is patience. Sinclair says: “Tat’s not neces- sarily the wrong thing to do, but can


‘‘


We can’t deny we’re living in exceptional times. What we need at the moment is a steely focus – faced with a crisis of this kind, people often don’t think clearly


Malcolm Rust Partner and head of Shepherd and Wedderburn private client and charity teams


they afford to lose the money they are investing? It comes back to the mantra that you should only invest what you can afford to lose.” Charities and voluntary groups are


particularly affected by volatility in the financial markets, which Rust says has been a wake-up call for many inves- tors who have been experiencing fairly benign investment and tax conditions since the global financial crisis in 2008. When advising charities, Rust discusses how well they can weather a shock event; whether they would still have enough working revenue to continue their operations if an income stream such as an investment was stopped for three months or more; and, if not, what contingency planning has been looked at to address this. Early planning pays dividends in the


long-run, Rust explains, and this is dem- onstrated in another area of Rust’s work: succession planning. “Studies have been conducted that


show the effects of poor planning over generations, where say the grandfather built the business, the next generation made the business what it is, the genera- tion aſter that kept the business going… just, but the great-grandchildren frit- tered it all away. What we’re seeking to achieve is to break that four generational downward cycle and ensure businesses and individuals’ wealth can grow.” One important part of this is joined-


up Will planning, ensuring inheritance plans are updated regularly, particularly regarding tax rules and allowances, and that this dovetails with Shareholder or Partnership Agreements. Family Charters are also important documents to ensure issues surrounding succession plans are discussed early and rationally and are understood by each generation. Powers of Attorney is another area


that has become far more prevalent in recent years, as relatively young indi- viduals realise it is not only something that should be considered later in life. Planning ahead can avoid the unexpect- ed need to transfer on control of wealth. Rust adds: “Planning ahead is essential


to the approach we take in every area of our business. Making sure our clients are better prepared makes it easier to avoid the stress of fighting fires when the situation calls for cool heads and clear thinking.”


Wednesday March 25, 2020


Wednesday March 25, 2020


Published in association with


LEGAL ADVICE FOCUS ON


Budget update: Responding to the cut in relief for entrepreneurs


By Douglas Sinclair


Market falls have been a wake-up call for many investors who have been experiencing fairly benign conditions since the global financial crisis in 2008


Reducing Capital Gains Tax after cuts to Entrepreneurs’ Relief Te reduction of the entrepreneurs’ life- time limit from £10 million to £1 million stands out as a headline-grabbing change introduced in the recent Budget. While relatively few individuals claim


the relief each year, for those who qualify it results in very large tax savings (up to £1 million until the recent change). So, with HMRC cutting the level of the re- lief, what are the other options to reduce tax exposure on business sales?


Make use of multiple allowances Te new limit of £1 million applies per taxpayer rather than per transaction, so if shareholdings can be spread around a family group (e.g. by transferring shares to a spouse) it may be possible to make use of a number of separate allow- ances and therefore reduce overall tax exposure. For those thinking of undertaking


Socially responsible investing and charitable giving


By Lorna Brown A


s awareness grows of the complex nature of the world we live in, people have a genuine desire to


help drive positive social change. Tis is reflected in a number of emerging trends, particularly in the areas of investment and charitable giving. Socially responsible investment (SRI),


also known as ‘ethical’ or ‘sustainable’ investment, has developed significantly over the past 30 years. Environmental, so- cial and governance (ESG) considerations have become increasingly important, and we can perhaps point to high-profile is- sues such as climate change as the catalyst for this shiſt in investment objectives. SRI has become much more accessible,


particularly given the introduction of ethical investment stock market indices, such as the FTSE4Good, which measures the performance of companies demon- strating sound ESG practices. Investment managers have also established dedicated ethical and sustainable investment teams that focus on building resilient portfolios taking into account ESG considerations. Tere is certainly momentum behind


the movement to bring about positive change through investment, and so a shiſt in investment strategy is likely to have a positive impact both in terms of investor satisfaction and financial returns, based on a recognition that sustainable companies will do better in the longer term. Philanthropic giving has also gained traction as a result of a combination of factors, including the evolution of technology and social media, increased awareness of good causes and new channels for donations, such as the online platform JustGiving. While the


Lorna Brown: ‘positive change’


principal driver for those who undertake charitable giving lies in making a positive contribution to society, there is also the added bonus of attractive tax benefits. For instance, donations to a charity may qualify for Giſt Aid, which allows UK charities to claim back the basic-rate tax already paid on donations by the donor, and allows the donor to claim back any tax paid at the higher rate. Charitable donations are also taken


into account in the context of Inheritance tax (IHT) planning, on the basis that charitable bequests are exempt from IHT. With careful tax planning, the effective rate of IHT can be reduced from 40% to 36%, provided that at least 10% of the net estate is leſt to charity. We regularly advise our clients on how


to be more strategic in the charitable donations they make, and we collaborate with other advisers to help clients realise their philanthropic ambitions.


Lorna Brown is a solicitor in Shepherd and Wedderburn’s Private Client team. For more information, contact Lorna on 0141 566 8574 or at lorna.brown@ shepwedd.com.


Managing your digital afterlife By Gillian Campbell F


or most of us, laptops, tablets and smartphones are an integral part of life, the digital successors


to the filing cabinet, photo album and CD collection. But what happens to those digital assets when we die? Due to the complexities around the


types of information stored online, there is no precise legal definition of what counts as a digital asset. Te assets exist in binary form and come with a right of access or use. However, that right usually dies


with us. According to its terms of use, an Apple/iCloud account, which may contain thousands of personal photographs and videos, terminates on death, at which point Apple may deactivate it. Social media applications such as Facebook and Instagram pro- vide a little more flexibility, allowing a family member to delete or memori- alise the deceased’s account. Assets that are not owned cannot


be legally passed on. For example, an extensive music collection held in an iTunes account may have cost the account holder a significant sum of money over the years. However, they only have a licence


to use this media during their lifetime. An iTunes collection cannot be giſted, as a vinyl or CD collection can during life or by means of a will. Tere has also been growing invest-


ment in cryptocurrency in recent years, increasing the need for clarity over legal definitions and access rights on death. Tis was the subject of an investigation by the UK Jurisdiction Taskforce, one of the six taskforces


digital custody key. Tis key code is vital in order to deal with the asset. Te asset is effectively lost forever if the digital custody key cannot be found. Planning for access to and manage-


ment of digital assets following a person’s death, whether these are of monetary or sentimental value, will save heartache for those leſt behind. A digital will can be incorporated within a traditional will or prepared as a separate document, appointing an executor to deal with digital posses- sions on death. Planning can also be undertaken,


Gillian Campbell: ‘Due to the complexities around the types of information stored online, there is no precise legal definition of what counts as a digital asset’


of the LawTech Delivery Panel, an industry-led group charged with sup- porting the digital transformation of the UK legal services sector. Te task- force subsequently released a ‘Legal statement on crypto-assets and smart contracts, ’ which states that crypto- assets are to be treated as property under English law. Tis has important consequences,


as property can be passed on by inheritance through testate or intestate succession. A practical difficulty for the execu-


tor of a person who was believed to own cryptocurrency is locating their


using a power of attorney, so that someone can act on your behalf in the event of a health issue or accident that incapacitates you. When granting a power of attorney,


consideration should be given to providing your attorney with powers to enable them to access and manage your digital information and assets. Compiling an inventory of your


digital assets and accounts, including user names and passwords, will give your digital executor and attorney a vital source of information. An online search shows that there are now many companies offering secure digital asset and password management facilities. You may also find it insightful to


review the policies of your various social media and internet service providers.


Gillian Campbell is a partner in Shepherd and Wedderburn’s Private Client team. For more information, contact Gillian at gillian.campbell@ shepwedd.com or on 01224 343549.


such planning they should remember that, under previous changes to the entrepreneurs’ relief rules, the holding period to qualify for relief was increased from one to two years; undertaking plan- ning in good time is therefore important.


Defer the gain It is sometimes possible to defer the disposal for capital gains tax purposes and then look to manage the inherent liability over time. For example, it may be possible to take some of the consider- ation as “loan notes”, with the associated capital gain being deferred until those notes are encashed. Doing this only de- fers the tax but if the notes are encashed gradually it could reduce overall tax exposure.


Use Investors’ Relief One unusual aspect of the reduction in the entrepreneurs’ relief allowance is that this was not matched by a similar reduction in the lifetime allowance for “investors’ relief” (which remains at £10 million). Until recently, there has been relatively


little focus on investors’ relief but with the reduction in the entrepreneurs’ relief allowance it is likely that taxpayers will look to take advantage of investors’ relief where possible.


Go offshore Leaving the UK to reduce tax liabilities has always been an option but it is a relatively unpopular one. Tis is for two reasons. Firstly, until the recent change the tax rate applying on most business sales was very low. Secondly, while leaving the UK may


sound like an attractive option on paper, the need to remain non-resident for an extended period in order for such plan- ning to work means it oſten turns out to be a less attractive option in practice. While the practical complications of leaving the UK will remain in place, given the greater tax exposure that busi- ness owners may face in a sale, it may be


Under previous changes to the entrepreneurs’ relief rules, the holding period to qualify for relief was increased from one to two years; undertaking planning in good time is therefore important


‘‘ Douglas Sinclair


that in future, “going on a Sunak cruise” becomes a more common option.


Retain assets until death While it is the ultimate example of the adage, “never let the tax tail wag the life- style dog”, the changes to entrepreneurs’ relief have underlined the fact that for some business owners retaining assets dying while still “in harness” is oſten the best way to minimise tax. Tis is due to a combination of


business property relief (which can ef- fectively remove business interests from the inheritance tax net) and the tax-free “rebasing” that occurs on death. While these rules remain in force they provide a way to potentially remove capital-gains tax liabilities altogether if sales can prac- tically take place following a death rather than before.


Douglas Sinclair is a partner in Shepherd and Wedderburn’s Private Client team. For more information, contact Douglas at douglas.sinclair@ shepwedd.com or on 0131 473 5710.


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