IHT planning without losing control or access.
The thought of your beneficiaries facing an Inheritance Tax (IHT) liability on the estate you have worked hard to create and pass on may be frustrating, especially considering you have paid tax on your income, savings and investments throughout your working life. Thus, planning for IHT is a matter that should be considered.
At present, everyone has a nil rate band of £325,000, or £650,000 for couples, that are married or in a civil partnership. Since April 2017, the Residence Nil Rate Band (RNRB) started to increase the threshold progressively to £500,000 or £1,000,000 for married/civil partners. This is set to be achieved by April 2020.
The remaining value of the estate which exceeds the nil rate band will be liable to 40% IHT on (usually second) death. Furthermore, estates which have a value exceeding £2 million lose part or all of the additional RNRB, which will be tapered down at a rate of £1 for every £2 over the £2 million threshold.
There are many different products that specialise in reducing or mitigating IHT, traditionally involving making gifts into trusts.
However, in some circumstances investors may find them restrictive. For instance, gifts or trusts can take several years to be fully effective and can mean giving up control of, and access to, your assets.
However, a Business Property Relief (BPR) based investment might be the answer to the above. BPR was introduced in 1976 as a tax relief by the Government to attract investment towards certain types of trading businesses.
BPR assets remain owned by you and part of your estate. However, after holding them for two years, they can either be fully or partially exempt from IHT. Typically, BPR can be available from an interest in a business or a partnership, shares in businesses that are not listed on the stock exchange, on land and buildings, or plant and machinery when utilised in a qualifying trading business.
A BPR scheme may be beneficial if one didn’t wish to give away large sums of money as a gift during their lifetime to reduce the value of their estate, as the shares held will be in the investor’s name and remain a part of their wealth – and therefore can potentially be sold and accessed if needed.
A BPR will also provide an opportunity for the individual’s wealth to grow, as the investment has a potential to increase in value. However, as with most investments, there are no guarantees that it will grow and losses may occur. Indeed, investment in smaller companies does carry specific risks investors should be aware of.
There are a number of schemes available which offer investors access to a managed portfolio of BPR qualifying companies. These typically will either fall into one of two categories: those aiming for high growth or those aiming for capital preservation.
For many, particularly older investors, the schemes that aim to provide modest returns with less volatility and security of capital will be the most attractive. These are typically invested in companies underpinned by physical assets with stable and visible income streams (for example, care homes, nurseries, renewable energy installations, etc.). We analyse these schemes regularly, with several successfully delivering annual returns of
3-4% after charges (although this is not guaranteed) as well as the main benefit of successfully providing exemption from IHT.