How Alan’s adviser helped him kick start his estate planning
29 June 2020
Jessica Franks, head of tax at Octopus Investments, takes a look at a valuable relief for clients who sold a business in the last three years.
Let’s consider a client scenario.
John has been Alan’s financial adviser for 27 years. For most of that time, Alan ran his own business. Alan is a widower, so was reluctant to retire, but two years ago, he finally decided to sell the business. In the event, he received £3 million.
Alan wanted to invest around half the proceeds to generate a retirement income, which John helped him do soon after the sale of the business went through.
Selling the business did create a problem, though. John made Alan aware that now he’d sold his business, he was left with a substantial inheritance tax liability. Without planning, this would reduce the amount his three daughters would receive when he dies.
Alan agreed that this is something he wanted to plan for. But at the time, having just retired he was preoccupied with generating an income and using his free time to travel. So, he left the estate planning for another day.
One year later, and unfortunately Alan has developed some serious health issues. He decides that it’s now or never to do some estate planning.
John discusses Alan’s situation with the paraplanner he works with. Now that Alan is in poor health traditional forms of estate planning, such as making lifetime gifts, may not be suitable because they can take seven years to become fully free from inheritance tax.
However, they decide that Alan has another option.
John has some good news for Alan
Had Alan passed away when he still owned his company, his shares in the business would have been expected to qualify for Business Property Relief (BPR), a long-standing relief from inheritance tax. This would have meant he could have left those shares to his daughters free from inheritance tax.
Ordinarily, a new investment into BPR-qualifying shares must be held for two years before it is free from inheritance tax. However, John has some good news for Alan.
John explains to Alan that there’s a three-year window following the sale of a business that qualified for BPR. During that period, if Alan uses some or all of the proceeds from the sale of his business to purchase another BPR-qualifying business, that new investment should immediately qualify for BPR. The same is true if Alan invests the proceeds in the shares of a BPR-qualifying business managed by someone else, or in a BPR-qualifying investment portfolio.
This comes as a huge relief to Alan, who had been worried that he’d left estate planning too late.
Based on Alan’s objectives and attitude to risk, John recommends investing £1 million into a BPR-qualifying portfolio managed by a specialist manager. By making the investment John recommends, Alan would hold shares in a portfolio of unlisted or AIM-listed companies that would be expected to be able to be left free from inheritance tax to his children when he passes away.
BPR-qualifying portfolios are higher risk investments than Alan’s portfolio of main-market listed equities, and the tax relief is designed to compensate investors for the risk they take.
Alan’s adviser explains the risks
John makes it clear to Alan that the value of any BPR-qualifying investment, and any income from it, can fall or rise. Alan may not get back the full amount he invests.
John also explains that BPR is assessed by HMRC on a case-by-case basis, and that this assessment happens when an estate makes a claim. Entitlement to claim the relief will depend on the company or companies Alan invests in qualifying for BPR at the time the claim is made. Tax relief will also depend on personal circumstances, and tax legislation could change in future.
While Alan is not expected to need to access this pot of money during his life, the investment will remain in his name, and so he will be able to request a withdrawal should he need to. John makes clear that withdrawals cannot be guaranteed, though, as the shares of unlisted companies can be harder to sell than shares listed on the main market of the London Stock Exchange. They may also be more volatile.
Peace of mind
Alan is comfortable with these risks, and decides to act on John’s recommendation. He invests the £1 million into a BPR-qualifying investment. Should Alan be unfortunate enough to pass away tomorrow, he knows that his daughters should inherit those shares without having to pay inheritance tax. As you can imagine, this is valuable peace of mind for Alan.
At Octopus, we work with a lot of advisers like John whose clients have sold a business in the last three years. So we’ve created a dedicated webpage for this client scenario. You’ll find a short video and more detailed information, including how the planning might look in practice, to help you take the next step with your own client. You’ll also be able to contact one of our experts should you have any questions.
To find out more, go to octopusinvestments.com/alan.
We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No.03942880. Issued: June 2020. CAM009829.
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