For professional advisers and paraplanners only. Not to be relied upon by retail investors.
March saw the Chancellor set out the government’s plans to support an economic recovery following Covid-19 and to help rebalance public finances over the longer term.
The Budget announced important inheritance tax thresholds – both the nil-rate band and main residence nil-rate band – would be frozen until at least 2026.
The five-year freeze is expected bring in £985 million in extra inheritance tax revenue. And it means more than 36,000 estates a year are expected to pay IHT by 2026, up from around 25,000 estates currently.1
Jessica Franks, Head of Tax, Octopus Investments, provides paraplanners with some useful pointers.
What is Business Property Relief?
Business Property Relief is a longstanding inheritance tax relief that can be a useful option as part of a client’s estate planning. Once a client has held a BPR-qualifying investment for two years, it becomes zero-rated for inheritance tax. The client can then continue to hold the investment until death, at which time it can be passed on free from inheritance tax.
This two-year period is significantly shorter than the seven years it typically takes for gifts to become fully exempt. Because of this, it’s common to think of BPR as an option for very elderly clients who have not done as much estate planning as they might have, or for clients who are in ill health.
While such clients could indeed benefit by making a BPR-qualifying investment, they are not the only ones. Read on to see how BPR could benefit clients in a variety of different situations.
It’s important to note that this type of inheritance tax planning puts capital at risk. The value of a BPR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. You’ll find a fuller description of the risks later on in this article.
Clients who want to do estate planning while keeping their capital in their own name
Research commissioned by Octopus found that 80% of advisers feel their clients have become more mindful, compared to five years ago, of potentially needing access to their money in later life.2
One of the advantages of a BPR-qualifying investment is it stays in the client’s name. That means if a client’s circumstances change and they need to access some or all of it, they can request to make a withdrawal, subject to liquidity being available.
By contrast, once a gift is made it can’t be accessed later.
Clients with a Power of Attorney in place
BPR-qualifying investments may be a suitable estate planning strategy where gifting or trust transfers are restricted or prohibited under Court of Protection rules because it is an investment that remains in the donor’s name. And unlike strategies that rely on life assurance, there is no underwriting and no medical forms to complete.
Business owners looking to sell their business (or who have sold a business within the last three years)
If a client owns their own business (or a stake in one) and its activities meet the qualifying criteria for BPR, that means they should be able to pass on their shares in the business free from inheritance tax when they die.
If they sell some or all of their business, the proceeds would be subject to inheritance tax when they die, immediately increasing their exposure to inheritance tax. However, if they use some or all of the proceeds to buy shares in another BPR-qualifying business within three years, those shares should be zero-rated for inheritance tax from day one.
Clients with large ISA portfolios
An ISA offers valuable tax benefits during a client’s lifetime, but is still subject to inheritance tax along with the rest of their estate.
However, a client can transfer some or all of their existing ISA into one that’s invested in BPR-qualifying shares. By doing so, they retain ISA tax benefits, as well as control of their money. Once they have held the new ISA for two years, it should be zero-rated for inheritance tax.
It’s worth remembering that a BPR-qualifying ISA is likely to be higher risk than more mainstream stocks and shares ISAs.
Clients looking to settle assets into trust
A lifetime transfer of assets into a discretionary trust is a chargeable lifetime transfer, and can immediately trigger a charge of 20% on the amount settled that is in excess of a client’s nil-rate band.
One alternative could be to invest in BPR-qualifying assets, hold them for two years, and then settle those assets into trust. This should not trigger a charge, as the shares would qualify for BPR and therefore be zero rated for IHT.
As noted earlier, BPR-qualifying investments put a client’s capital at risk. The value of these investments, and any income from them, can fall as well as rise. Clients may not get back the full amount they invest.
Clients should also be made aware that tax treatment depends on individual circumstances and tax rules could change in future. In addition, tax relief depends on the companies they invest in maintaining their BPR-qualifying status.
The shares of unquoted and AIM-listed companies can be more volatile than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
Identifying clients who could benefit from tax-efficient investments
We look at how BPR fits into the inheritance tax picture, plus some real-life client scenarios you might come across.
(2)Research conducted by Octopus and VouchedFor via an online survey of 714 financial advisers in January 2021.
BPR-qualifying investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. 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: March 2021. CAM010830.