I am a businesswoman based in Dubai. I have just sold my international business and wish to safeguard the money in the UK for my children, who are at boarding school in England. What is the best way to do this?
Camilla Wallace, partner and head of private client group, Wedlake Bell, recommends using a trust. Trusts provide for an orderly transition of wealth, taking into account the personal and financial circumstances of each family member at the time of benefit.
They involve a settlor (you) transferring legal title to some of your assets (the “trust fund”) to trustees who then hold the assets for the benefit of the beneficiaries (you and your family).
As the beneficiaries do not own the trust fund outright, the assets are effectively safeguarded until such time as would be appropriate for them to receive some or all of the funds. The timing of this would be written into the trust documentation.
I will assume that you are non-UK domiciled and non-UK resident and your children are with you in Dubai or outside the UK during all holidays and half-terms. On this basis, a trust could be settled with the proceeds from the sale of your business (provided the proceeds are not in the UK or are transferred out of the UK before settlement) and be used to fund your children’s school and university education and other family costs without any UK tax implications.
You need to think of someone who could act as trustee, to step into your shoes as the owner or custodian of the family wealth. There are a variety of options: private equity-owned fiduciaries with impressive global reach or big bank-owned trust companies which might also like to run the underlying investments. Economies of scale can be enjoyed with this “under one roof” approach but conflict can also arise.
Or, being entrepreneurial, you might favour an independent owner-managed trustee or even your own private trust company. The trustees could be based locally or elsewhere such as the Channel Islands.
With the use of a carefully constructed trust deed, a detailed “letter of wishes” and possibly the use of a “protector” (a trusted friend to oversee proceedings), you can be comforted that your wishes will be followed.
Trusts provide continuity as regards succession, protection as regards to claims (marital or otherwise), flexibility as regards to inheritance (who, what, how, how much) and stability as regards to management of family wealth.
If a trust does not suit you, an alternative structure is a foundation, sometimes described as a hybrid of a trust and a company. With careful drafting, a foundation can be treated as a trust in the relevant jurisdictions.
Should my mother take out another equity release loan?
My mother took out an equity release lifetime mortgage which she didn’t realise would accumulate so much interest so rapidly, though the paper trail suggests she did understand it at the time. Because she can’t afford the service charges in her flat she is selling it and paying back her equity release debt, including a hefty repayment fee. To buy a new property, she is thinking of getting a new equity release loan, this time with a fixed lower rate.
Is this sensible? Would it be worth her giving me the money and me trying to raise the extra £100,000 in a buy-to-let mortgage? This would have the effect of potentially saving inheritance tax should she live for more than seven years. What might the implications be for my brother, who would normally expect to inherit equally but can’t invest? Do mortgage companies allow relatives to live in such a flat rent-free?
Will Hale, chief executive at Key, an equity release adviser, says there are quite a few factors to consider, so my response should be considered as a precursor to getting professional advice rather than a substitute for it.
As the chief executive of a company that specialises in equity release, you can imagine that any potential mis-selling of these products is something that really concerns me. However, we do know that people’s recollection of product details can fade if it has been five, 10 or 15 years since the transaction. Therefore, you do need to be comfortable that your concerns are based on what was discussed then rather than what is remembered now before you proceed.
What your mother should do depends on the answer to a variety of questions, including how old she is and whether the inability to pay the service charge is the only factor behind her moving. If she is older and keen to stay in her home, you may want to see if she can get a further advance from her existing lender to cover the service charge until she passes away or goes into care.
While the interest will still increase, you will avoid the early repayment charge and she will not need to move. Alternatively, industry standards guarantee people the right to take their equity release plan with them when they move, if they move into a suitable property and the loan-to-value ratio is acceptable.
This might be something to consider as she could avoid paying the repayment fee. If these figures don’t add up then using equity release to support the purchase is certainly an option, as products are offering rates from 3 per cent at the moment.
All new equity release plans allow customers to make ad hoc capital repayments so depending on your mother’s situation, you may want to use this as an option to manage her borrowing going forward.
Buy-to-let is not our specialism but you may not be able to rent to a family member — especially as lenders base some of their calculations on rental income. You also need to pay higher stamp duty on a second property and may be liable for capital gains tax when you come to sell it, so factor this into your calculations.
Given the complexity of your situation, I would strongly suggest that you and your mother speak to a specialist equity release adviser regarding options around the existing loan.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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