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Cash Is King – Debt Recovery for Business following Bathstore Going Down The Drain by Karl Medd

Why Keeping Your Debtors in Check is Vital for Your Business

 

When the specialist retailer Bathstore collapsed last month, 500 shopfloor and head office jobs were put at risk together with up to 300 bathroom fitters, suppliers and small businesses  paying a price. An article in the Guardian on The collapse of Bathstore makes a clear point, as do the case studies set out within it, that these are challenging times for businesses in all sectors. It does feel like there have been so many stories within the media regarding the precarious finances of some of the UK’s biggest businesses including Debenhams and Arcadia Group to name but two.

The difficulties of big business and the wider economy can also have a significant trickle down effect upon small and medium sized businesses, which are referred to in business jargon as “SMEs”. The article lays bare the effect that the failure of large business can have upon SMEs. One large contract or transaction can make, or break, an SME.

For the sake of impartiality, we have so far not mentioned Brexit, but this is clearly a matter of ongoing financial concern for business.

It is not just the financial fortunes of Big Business which can impact upon SMEs, as small and medium sized businesses very often work and trade with each other and therefore the livelihoods of all of employees are likely dependent upon receipt of payment, or contractual provision of goods and services, promptly.

Cash flow is extremely important for SMEs. In fact even law firms are not immune to the financial pressures of cash flow and bad debt. There is a well rehearsed adage in business and accounting circles which sums up the position neatly: “Turnover is vanity, Profit is sanity, but Cash is king.”

Reality can be extremely harsh if your business is struggling to recover bad debts which are impacting upon the financial health of your business.

At Clark Willis Law Firm, our Civil Litigation team are experienced in pursuing recovery of trade or commercial debts on behalf of individuals and SMEs and we act for some well-known business in the town to assist with their debt recovery. We can also provide practical advice and information as to your legal position should your debtor become insolvent, be it liquidation, Administration or a Voluntary Arrangement. So before outstanding invoices start having a detrimental impact on your business call our team on 01325 281111 to discuss ways we can help you.

Life Interest Will Trusts – Protecting Property & Assets by Alex Spurr, Solicitor

Life Interest Trusts In Wills – Why You Might Need One To Protect Your Property & Assets

What is a Life Interest Trust?

Life Interest Trusts, sometimes called Asset Protection Trusts, are the familiar term given to a legal arrangement called an Interest In Possession Trust. They are termed Life Interest Trusts because they give a particular person (the life tenant) the legal right to benefit from the assets being held under the trust. If this is a residential property, this would include a right to reside in the property, or if it is liquid assets, such as cash or investments, the right to receive the income.  This right normally lasts throughout the beneficiary’s lifetime, hence the name life tenant, although sometimes the right might end earlier, for example if the beneficiary required full time residential care or on remarriage.

A Life Interest Trust can hold money, but the arrangement is most often used over a residential property by spouses, civil partners or cohabiting partners.

The Will would specify what happens to the trust property when the life tenant dies (or stops having a benefit if an earlier event occurs) for example passing down to children or other nominated persons.

Normally, the trust allows the assets of the trust to be altered so that if the life tenant wished to move for example, the trust could dispose of property A and acquire, or part acquire, property B to enable the trust to adapt to life events and circumstances.

If the trust held other financial assets, a property sold and the trust held funds not used entirely in the purchase of a new property, then the life tenant would normally be entitled to the income generated by these funds although the trust could be drafted to enable the trustees to pay out capital sums to the life tenant or ultimate benefactors.

Why Might I Want One in My Will?

The main reason is to preserve whatever is in the trust, such as a share in the family home or financial assets. As the life tenant does not physically own the trust assets they cannot be included in their own financial affairs. This can be important post retirement for safeguarding assets from long term residential care costs and throughout life to safeguard assets for the bloodline, to ensure your children inherit. If you consider multiple marriages are now common place and an ageing population means care costs are a increased risk, you may appreciate that building in levels of security for your financial affairs can have long term benefit.

Example One – Care Fees

Alan and Rita are retired and live in a 3 bedroom detached property valued at £250,000 and have £20,000 each in the bank. Alan dies and leaves his property share and money in the bank to Rita. Rita later requires care and all of the property and cash in the bank can be used to fund that care. Rita is self-funding and when she passes away, is left with the bottom threshold of £14,250 which passes between their 2 children.

If Alan and Rita had included a Life Interest Trust in their respective Wills over the property only, in the above scenario, after Alan died, Rita would own her half of the house outright and have the benefit of Alan’s whilst she was alive, meaning she had security, but Alan’s Will specifies that ultimately his 50% of the property passes to the children after Rita’s death. When Rita went into care this time, only her 50% of the property and the savings could be used to fund her care, meaning the children would inherit the £14,250 from Rita’s assets on her death and 50% of the home that was subject to the Life Interest Trust, being an extra £125,000.

Example 2 – Young Family

Neil and Sue are in their 30s with three children under 10. Sue has a fatal accident and Neil inherits her estate. After a few years of being a single parent, Neil meets Helen, another single parent with one child, and several years later they cohabit and ultimately marry. Neil then dies at 76 leaving Helen as his surviving widow. Helen inherits everything and then makes a Will leaving her entire estate to her child and nothing to Neil’s three children. Neil’s original three children are disinherited.

If Neil and Sue had included a Life Interest Trust in their respective Wills over the property, in the above scenario, after Sue’s death, half of the matrimonial home would always have been protected for her three children rather than them being disinherited.

Who are the Trustees?

The executors, or possibly alternative specified trustees by you in the Will, have the job of safeguarding the trust assets and must always act in the best interests of all the beneficiaries.  Care must be taken when choosing who should act in this role.  The surviving partner can be a trustee, but should not be the only one, and perhaps a adult child or sibling should act together with them.  Unless the Will provides otherwise, the trustees will have to act unanimously, so that a surviving partner cannot override the terms of the trust or act in their own best interest.

If there is a property share involved, the trustees would usually go on the title deeds together with the surviving partner and a restriction placed on the title deeds to make reference to the trust.

Inheritance Tax (IHT) Issues?

The life tenant is treated as if he or she owned the trust property for the purposes of Inheritance Tax (IHT) and so will attract the usual spouse exemption if established under a spouses Will. On the death of the surviving spouse they may also have the ability to use the unused element of the predeceasing spouses tax free level, and unused extra residential property allowance, which will not have been decreased by establishing the trust.

If cohabiting partners include Life Interest Trusts then no similar spouse exemption is available although the level of IHT, if payable, will be no different by including this arrangement. There can be circumstances, if each cohabiting partner has their own children that the arrangement can cause the full or partial loss of the additional residential property allowance dependant on circumstances.

The primary position is Inheritance tax (IHT) is payable at 40% on a person’s assets over £325,000 on death and certain gifts made during their lifetime. There are also additional residential property allowances, transferable allowances between spouses and a range of exemptions and reliefs before IHT becomes payable.

On the life tenant’s death, subject to any exemptions or reliefs which then apply, IHT will be payable on the combined value of the trust assets and the life tenant’s own estate.  The trustees will be responsible for paying the proportion of the IHT payable in relation to the trust assets and the executors of the life tenants other estate, on the estate other than the trust.

Other Taxation Issues?

The trust may also be liable for Income tax and Capital Gains tax.

If the trust only includes a share in a residential property then no income tax is likely to arise or capital gains tax issues if the equivalent of an individuals main residence relief is available. For most Life Interest Trust this is the outcome.

Where the trust holds other assets then the taxation position may change. If the trust holds income producing assets, trustees will be liable for tax at the normal rates for income or dividend income.  Where any income is mandated to the life tenant, for example interest credited straight to their bank account so the trustees do not touch the income, then the life tenant would simply reflect this on their own tax returns as their own income.

If the assets held on trust increased above the trustee annual exemption for Capital Gains tax (currently half of an individual’s allowance) then the trustees may be liable for paying CGT if no reliefs are available.

Summary

In modern society, second often third marriages are common place and healthcare advances coupled with lifestyle changes mean that life expectancy has increased causing greater demand on residential care in later stages of life. These two factors alone mean that taking simple steps like including a Life Interest Trust arrangement in a Will for a spouse, civil partner or cohabiting partner can ensure protection for your descendants but without compromising the survivor’s ability to benefit during their lifetime. Where the residential home is included in such arrangements, the taxation side of things is often a non issue.

Whatever stage of life you are at, when owning a property jointly and making a Will, or where one person owns the property in their sole name but cohabits, then we will always discuss with you protection opportunities, including Life Interest Trusts, so that you can make an informed decision on planning your affairs.

As with all legal advice, your own particular circumstances may impact on the suitability of such an arrangement and so we would recommend you contact our specialist Wills team at your local office to discuss your affairs. Call us today on 01325 281111 or 01748 830000 to arrange your no obligation, complimentary discussion.

Relax & Enjoy Your Retirement Knowing You Are Covered – Wills, LPAs, Care Fee & IHT Planning by Alex Spurr, Solicitor.

Retirement is a significant life event and often coincides with a change in your financial circumstances. Whilst sorting your legal affairs might not be the first priority on your to do list, dealing with matters at the start of retirement, or even better whilst planning your retirement with your financial adviser, means that you are free to enjoy your retirement years with peace of mind that you are protected.

Wills

The most important consideration is to make a Will. A Will is the only way of ensuring your property and affairs benefit those whom you would wish to do so. People who do not make a Will are leaving unnecessary work, possible complications and costs to their family.

If you do not make a Will the “Intestacy Rules” will decide which family members will receive your money and possessions after you die. Your whole estate may not automatically pass to a surviving husband, wife or civil partner as most people presume. Unmarried partners will not automatically inherit often causing financial hardship and distress. Surely it would be better to make sure that the people you wanted to benefit following your death was controlled by you?

Wills are also a useful way of including any specific funeral wishes you may have. Even a basic decision as to whether a family member wanted cremating or a burial can cause conflict or be emotionally challenging during a period of grief.

If you already have a Will it is also important to consider reviewing it. Changes in family, financial circumstances or the law may no longer reflect your current wishes or include unnecessary complications. Since 2007 there have been significant changes to inheritance tax for married couples/ civil partners and the introduction of a residential property inheritance tax allowance which may make Wills made over 5 years ago, and certainly prior to 2007, no longer appropriate for estate planning or certainly worth a review.

Lasting Power of Attorney

Have you considered what would happen if you were unable to manage your financial affairs or make decisions over your healthcare treatments due to an accident, old age or illness? This may be temporary, such as hospital stay, or permanent with an illness such as Dementia.

Lasting Power of Attorney (LPA) allow you to appoint the person or people you would like to take those key decisions for you. Without it, a family member or friend would have to make an expensive and time consuming Court application and suffer annual administrative requirements.

You can give authority to assist you with your financial affairs, including property, and/or your health and welfare.

It is important to note that an LPA does not take away your independence or control whilst you have capacity and you can limit the decisions you may wish your Attorney(s) to take on your behalf.

An LPA can only be drawn up whilst you have mental capacity and whilst it might sound daunting, the key is to deal with it sooner rather than later whilst your health is not an issue. Think of LPAs like an insurance policy to protect you should you need it in the future.

Asset Protection & Long Term Care Costs

As a population we are living longer and an increasing number of us face the real possibility of going into residential care in the future. Most people are concerned about funding long term residential care with an average cost of £700 per week in the North East.

Currently, if your assets exceed £23,250 (including the value of your property) then you will be self-funding and have to pay for your care yourself with the exception of certain medical conditions. Life savings are being eroded and family homes intended to pass as inheritance may be utilised to fund care for those without planning in place.

As the need for residential care approaches, people may be tempted to transfer their homes into the names of children or to give away large sums of money. If you do so and the Local Authority claim you have purposely done so to avoid the asset being used to pay for care you can still be treated as owning that asset. There is also a significant risk that children may get divorced, have financial difficulties or predecease you causing someone outside the family to get an interest which ultimately could cause you to lose your own home.

It is important to take advice on what assets are considered in any funding assessment, financial options available to you and the structure of your finances to appreciate how residential care may apply to your circumstances. Steps can be taken that can preserve your assets from funding long term care but these have to be considered based on your planning as a whole and reviewed whilst you are in good health. It is essential to take expert legal advice to fully understand your options as early as possible.

Inheritance Tax Planning

In 2018/2019 tax year, the money received by HMRC through Inheritance tax (IHT) was £5.4bn, a staggering level considering it is often termed a voluntary tax as with correct planning the amount of tax payable can be significantly reduced.

The basic principal is that each individual has a tax free estate of £325,000 with additional allowances (currently up to £150,000) being available if residential property is left to direct descendants.

People wrongly assume that tax planning is complicated and whilst it can be for very significant estates, it is often very straight forward with a strategy of steps to achieving tax mitigation. This may include working with financial advisers on arranging your wealth, looking at lifetime gifts or the beneficiaries of your estate to maximise exemptions and reliefs available with the combined aim of minimising the tax bill whilst achieving your succession aims.

Your Next Steps

The Private Client team at Clark Willis not only have a wealth of experience in these matters but also include members of Solicitors for the Elderly and the Society of Trust and Estate Practitioners (www.step.org) so you can have peace of mind that your retirement plans are in safe hands. Take the first steps to your peace of mind by contacting our team today on 01325 281111.