With inheritance tax nil rate band exemptions having been frozen in the 2020/2021 tax year until 2026/2027 and asset values having generally increased, for an increasing number, planning for Inheritance Tax (IHT) is an important consideration. It can be concerning to think about your beneficiaries facing an Inheritance Tax liability on the estate you've worked so hard to create and pass on; in some instances the tax payable being greater than the sum received by an individual beneficiary. For this reason many choose to plan to avoid this possibility.
Presently, everyone has a nil rate band of £325,000, or £650,000 for couples that are married or in a civil partnership. Since April 2020, the potential availability of the Residence Nil Rate Band (RNRB) increased the threshold to £500,000 or £1,000,000 for married/civil partners. The remaining value of the taxable estate which exceeds the available nil rate bands may be liable to 40% IHT; usually on second death for spouses. 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 a multitude of different solutions for reducing or mitigating IHT. Making gifts into trusts being one of the most common. In some circumstances though, investors may find them restrictive. For instance, gifts or trusts can take several years to become fully effective and can mean giving up control of, and access to, your assets. The administrative/reporting responsibilities associated with being a trustee are often overlooked too.
However, a Business Relief (BR) based investment might be the solution. Legislation introduced in 1976 was aimed at attracting investment towards certain types of trading businesses, with inheritance tax relief on death being one of the appeals.
Unlike assets transferred to a trust, BR investments remain part of your estate. After holding them for two years, they can either be fully or partially exempt from IHT. Typically, BR 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 BR scheme may be beneficial if you don’t wish/are unable to give away large sums of money as a gift during your lifetime to reduce the value of your estate. The shares held will remain in your name and therefore can potentially be sold and accessed if needed.
A BR investment will also provide an opportunity for the individual’s wealth to grow, as the investment has the potential to increase in value. However, as is the nature of non-cash based investments, there are no guarantees that it will achieve its objectives, and losses may occur.
There are several schemes available which offer investors access to a managed portfolio of BPR qualifying companies. These typically fall into one of two categories: those aiming for high growth or those aiming for capital preservation.
For many 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 an exemption from IHT.