Inheritance Tax Advice on Business Property Relief

Business Property Relief

The value of pensions and investments can fall as well as rise, you may get back less than you invested.Your home may be repossessed if you do not keep up repayments on your mortgage.

There is a growing market of investments that qualify for Business Property Relief (BPR). BPR was introduced in 1976 to enable owners of small and medium-sized enterprises to pass them on “intact” to their chosen beneficiaries. However, over the past decade, many fund managers who invest in small and unquoted companies have developed services that utilise BPR, providing their clients with 100 per cent IHT mitigation after a two-year investment period.

Anyone with an estate that exceeds the nil-rate band who wants to retain access to their wealth and still see some growth could find a solution in BPR-qualifying investments attractive.

Why?

You don’t want to give away large sums of money: You can give your money away during your lifetime to reduce the value of your estate, but it’s not an option every client feels comfortable with. However, with a BPR-qualifying investment, the shares are held in the client’s name, which means they keep hold of their wealth.

You want to give the inheritance you plan to leave behind the chance to grow. Investing in BPR-qualifying companies means their investment has the potential to increase in value, but as with any investment, there are no guarantees, and they could of course lose some or all their original investment.

You want the money you invest to become IHT exempt quickly: Some people are put off by traditional estate planning strategies, such as making gifts or putting money in trust, as these typically take seven years before becoming fully exempt from inheritance tax. With a BPR-qualifying investment, the shares become 100% inheritance tax exempt after an investment holding period of just two years, if the shares are still held at the time of death.

There are some other instances where BPR might be the best option. When a lasting power of attorney is in place, gifting money is difficult and often impossible. However, often an attorney can implement a BPR strategy as an investment for and on behalf of the donor. A point of note is that some BPR investments are discretionary funds and as such not all LPA’s allow attorneys to manage these funds. (LPA’s drafted by Countrywide Legacy to include the power for the attorneys to manage discretionary funds).

It is also worth considering BPR in the context of the taper threshold for the new residence nil-rate band (RNRB). The RNRB will be tapered away by £1 for every £2 the net value of the estate is above a threshold of £2m.

For example, at present, if a client’s estate comprises a residence worth £1.7m and £650,000 of other assets, there will be no benefit from the RNRB. However, if £350,000 of those other assets were invested in a BPR-qualifying investment and then gifted to the beneficiaries after two years, the entire RNRB would apply again providing the full criterion is met. As a gift, the BPR-qualifying investment would be outside the estate for IHT purposes, even if it was a failed potentially exempt transfer (providing the investment “still qualifies” in the hands of the recipient trust/beneficiary at the date of death) because the client did not survive for seven years.

We differ from other advisory firms in that we provide truly joined up financial advice, meaning that we understand what ‘financial planning’ comprises of, i.e. working with a quality financial adviser, accountant & possibly legal firm, depending on your requirements. We bring these threads together to join up the dots and ensure that nothing is missed from your business and personal financial plan.

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