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Highlights: Tax Aware - Family Frictions: key issues for families and family offices

Posted on 27 July 2022

On 7 July we held our first in-person Tax Aware session since 2020. The panel discussed some common scenarios faced by families and family offices, and how they can each be addressed or resolved from the (sometimes differing) perspectives of tax, family and private wealth disputes. We have set out below the key insights from the event.

Getting married

The family law issues:
  • A couple intending to live together may want to enter into a cohabitation agreement, which will set out their intentions regarding the ownership of the home and how they intend to divide expenses and costs during the period of their cohabitation.
  • The couple should consider entering into a pre-nuptial agreement, recording the assets that they have each brought into the marriage and their intentions regarding their financial position should the marriage break down.
The tax and wealth planning issues:
  • It is possible to create wills in contemplation of marriage which would not automatically be revoked if they later get married, which is normally the case.
  • Gifts between spouses and civil partners often benefit from certain tax reliefs to allow for distribution of wealth between the parties. 
The private wealth disputes issues:
  • An express declaration such as a cohabitation agreement or declaration of trust is generally conclusive as to how they hold the property.
  • Where a couple is engaged, special rules apply to any financial contributions made to the improvement of the property during their period of engagement, for which a court may treat them as it would a married couple.

Having children

The family issues:
  • If the parents were married to each other, or from 2 December 2019 civil partners of one another at the time of the child's birth, they each have parental responsibility for the child - regarding important decisions in the child's life, such as which school they attend, what, if any, religion they should be brought up in, whether they should receive certain forms of medical treatment etc.
  • Where the parents were not married to each other at the time of the birth, the mother automatically has parental responsibility and the father does not: there is provision for the father to acquire it, for example if he is named on the birth certificate or by way of court order.
  • In relation to a child conceived after 6 April 2009 where the mother has a civil partner who is a parent pursuant to section 42 of the Human Fertilisation and Embryology Act 2008 (HFEA 2008) (relating to a woman who has assist) or HFEA 2008, s 43 (relating to a woman who has assisted reproduction treatment and who agrees that that second woman is to be the parent of any resulting child), the child's mother and the other parent will each have automatic parental responsibility for the child.
The tax and wealth planning issues:
  • Any existing wills need to be reviewed and guardianship provisions put in place for mutual and stepchildren, if not already accounted for. 
The private wealth disputes issues:

A stepchild can benefit from a stepparent's estate, whether:

  • Under a will that specifically provides for them; or
  • Under the intestacy rules, but only if they have been formally adopted; or
  • Under the Inheritance (Provision for Family and Dependants) Act 1975 (the 1975 Act), if the stepchild can establish they are a qualifying claimant over the stepparent's estate by proving prove either: (a) they were treated as a child of the family; or (b) they were being wholly or partially maintained by them. This is more difficult for adult stepchildren.

Wider family office disputes

The tax and wealth planning issues:
  • Where newlyweds are appointed as directors and/or given shares and interests in several family businesses, trusts and partnerships, tensions may rise between them and the family. To resolve such disputes, the underlying documents need to be reviewed.  This will be the trust deeds and all ancillary documents; the partnership agreement (although note that the default position is that the partners will be treated equally if there is no partnership agreement in writing); or the articles and memorandum of association of the company depending on the structure used.
  • To better prepare for such disputes, the parties could enter into a family charter – a written statement recording the family's heritage, family business plan, conflict resolution guide etc.  Whilst not legally binding, it provides guidelines as to how certain issues should be resolved. Alternatively, they can formalise family governance principles by entering into legally binding shareholder/partnership agreements to regulate corporate governance and introduce dispute resolution mechanisms. 
The family issues:
  • Couples can enter into a post-nuptial agreement and review any pre-nuptial agreement they put in place.  A post-nuptial agreement operates in a similar manner to a pre-nuptial agreement, but, as the name suggests, is signed after the marriage. Such agreement can provide that, in the event marriage breakdown, the shares and interests gifted by the family will be transferred back to the family and the directorships relinquished.
The private wealth disputes issues:
  • Trust deeds may be drafted to restrict trustees' duty to enquire into and supervise the management of the companies held in a trust, and their liability for the actions taken by directors. These "anti-Bartlett" clauses are named after the English case of Bartlett v Barclays Bank, which established that a trustee has a default duty to enquire into and supervise the management of a company held by a trust,

Separating and divorcing

Tax and wealth planning issues:
  • Transferring assets during the period of separation and divorce is wrought with complexity as different rules apply depending on the type of asset, when the transfer happened and the circumstances of the transfer, there are different rules for different taxes. For example, only transfers between spouses and civil partners that are made in the "tax year of separation" may be capital gains tax (CGT)-free, whereas transfers made any time until decree absolute should be inheritance tax (IHT)-free (subject to domicile status).
Family issues:
  • Upon a divorce, the court has significant redistributive powers. It can transfer assets and rights from one party to another and can even vary the terms of a trust. Pre-nups and post-nups will be taken into account where properly entered. 
  • Generally, courts try to avoid parties having longer term financial connections with each other. However, it may not be viable to administer assets in such a way as to permit that "clean break".
Private wealth disputes issues:

Divorcing or separating parties that stand to lose interests in family trusts upon a divorce may try to gain access to trust assets by:

  • Questioning the validity of the trust. The trustees will need to show that they are properly exercising their discretion and that they are genuinely independent from the settlor/ beneficiaries in doing so, demonstrating this by documenting their decisions and communications with the beneficiaries and keeping letters of wishes updated.
  • Varying the terms of the trust as a nuptial settlement, subject to any relevant firewall legislation that applies in certain jurisdictions to offer protections from an order of the Family Court to vary the trusts.

Death during divorce

Tax and wealth planning issues:
  • Any wills in place will continue to govern how the estate is to be distributed, otherwise the rules of intestacy will apply. 
  • The IHT spouse exemption will continue to apply if the couple are still married at the time of death, but the CGT spouse exemption may not, depending on the time of separation.
Family issues:
  • Orders made post decree nisi, but before decree absolute, for financial provision; property adjustment; or pension sharing are not effective, nor are they capable of being enforced (see MCA 1973, ss23(5), 24(3) and 24B(2)) post-death. Whereas, orders made post decree absolute, for financial provision are enforceable by the deceased's personal representatives.
Private wealth disputes issues:
  • If someone dies during financial proceedings, those proceedings do not survive death, as the proceedings were traditionally viewed to be personal to the parties and not an application that survives death.
  • Under the 1975 Act, where one party dies part way through divorce proceedings (or even after decree absolute/final divorce order if the death is within 12 months if the proceedings haven't concluded) then the court can treat the claim as if it was being made by a surviving spouse – i.e. with a likely enhanced level of provision.

Read the latest Tax Aware Publication

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