Business Relief - An IHT Life Raft

While only 4% of estates are currently liable to inheritance tax (IHT), the continued increase in house prices, rampant inflation and freezing of allowances will see more and more people pulled into this tax.

The average IHT bill is around £200,000, a substantial amount particularly when you consider of all taxes, IHT is the easiest one to avoid…but the hardest one to pay.

Taxable estates are on average split 50% property and 50% cash, shares and liquid securities. While planning to avoid IHT on the family home is somewhat limited, there are many options for other assets.

One popular solution is utilising Business Relief (BR), previously called (and still in common parlance) Business Property Relief.

Investments that qualify for BR can achieve 100% relief from IHT on the amount invested, after 2 years.

Why Business Relief exists

BR is a well established relief, first being introduced in the 1976 Finance Act. Its main aim was to ensure that after the death of the owner, a family business could survive as a trading entity, without having to be sold or broken up to pay an IHT liability.

Over time, successive governments recognised the value of encouraging people to invest in trading businesses regardless of whether they run the business themselves and in 1996, BR was extended to include investors with shares in qualifying businesses.

The types of business that typically qualify for BR

Not every investment or interest in a business will qualify for BR, but BR will typically be available for:

• Shares in an unquoted qualifying company, even a minority holding, and including Enterprise Investment Scheme and Seed Enterprise Investment Scheme holdings

• Shares in a qualifying company listed on the Alternative Investment Market (AIM)

• An unincorporated qualifying trading business, or an interest in one – a partnership, for example.

Key benefits of a BR-qualifying investment

Speed

Making gifts or settling assets into trust usually takes seven years to become completely free from inheritance tax.

An investment in a BR-qualifying company however, can be passed down to beneficiaries free of inheritance tax on the death of the shareholder provided it has been held for at least two years at that time. Some BR investments are combined with life cover which covers the IHT should death occur within 2 years of making the investment.

Access and control

Owning BR-qualifying shares allows the asset to stay in your own name.

BR-qualifying investments do not use the nil-rate band

This means investors can plan for their nil-rate band allowance to reduce the inheritance tax charge on less liquid assets, such as their home, which are otherwise difficult to place outside of the estate for tax purposes.

Packaged BR Investments

Few people run owner managed businesses that can be passed down IHT free and certainly less do so at the point of death.

Traditional estate planning solutions can be inflexible. If you give away your assets to family and friends during your lifetime, these gifts can take seven years before they become exempt from IHT.

The alternative might be to put your money into a trust, but both of these options result in you no longer being able to access your capital if you need to, and these days who knows what lies around the corner.

Packaged BR Investments, or Estate Planning Services as they are commonly known, invest into BR qualifying companies, aimed at generating steady modest returns, while providing liquidity if needed.

Planning Example – For those who require access to their investment

As a BR-qualifying investment is just that – an investment – it stays in the investor's name and offers ongoing access to capital.

Some people are reluctant to move forward with their estate planning because they feel uncomfortable giving away assets, even if they can afford to do so.

BR offers a way to plan for IHT while keeping assets in your own name.

Meet Margaret

Margaret is 86 and doesn’t want to lose access to her capital. She understands that the size of her £1.5 million estate means that when her children and grandchildren inherit it, they’ll need to pay an IHT bill.

She is keen to do some estate planning so that more of her estate can go to her loved ones. She can afford to give away some of her assets but she has been in control of her wealth all her life and is reluctant to make gifts or put assets out of reach in a trust.

She worries that if her health deteriorated, she might want to use the money to pay for her care. It takes seven years for gifts and assets in trust to fully fall outside an estate for IHT purposes and in seven years she’ll be 93.

So, Margaret's worried that if she passes away before then, she will still leave her beneficiaries with an IHT bill, even if she gives away assets immediately.

How a BR-qualifying investment can help

Margaret inherited an investment portfolio from her late husband. She could sell a portion of this and reinvest the proceeds into a packaged BR Investment. The investment will be made in Margaret’s name, meaning that she will retain ownership of her wealth.

If she needs access to some or all of her investment in the future, she can ask to sell some shares.

If she has held the investment for two years at the time of death, it should be able to be left to beneficiaries free from IHT.

Some providers offer downside protection on the investment and life cover in the event of death within two years.

The above is the scenario I see most often. I will look to post another article in the next month setting out various alternative scenarios for those:

• with Powers of Attorney in place

• who want an IHT efficient ISA

• who have sold a business in the last 3 years

• that are worried they have left it too late for planning

• that want to settle assets into trust

• whose estates exceed the Residence Nil Rate Band

What are the risks?

As with all investments, the value may go down as well as up and investors may not get back what they originally put in.

Tax rules could change in the future. The value of tax reliefs will depend on an investor’s personal circumstances. There cannot be any guarantee that companies that qualify today will remain BR qualifying in the future.

Investments in unquoted companies or those quoted on AIM can fall or rise more sharply than shares in larger companies listed on the main market of the London Stock Exchange and may be harder to sell.

Not All BR Investments Are The Same

These investments are marketed to those interested in Estate Planning and they typically talk of liquidity and capital preservation being key.

The underlying investments in each Estate Planning Service are different and examples are business loans, leasing, secured property finance, infrastructure funding, care homes and renewable energy projects.

That’s why it is important to get advice and make sure a BR investment is suitable and if so, which one matches your risk profile.

Speak with me if you want to find out more.