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More clients will be affected by IHT, and Business Relief could help them. Jessica Franks, Head of Retail Investment Products, Octopus Investments, explains.
Inflation is set to reach a 40-year high. As a result, clients are seeing the value of their estates skyrocket.
In fact, one in 42 homes in the UK are now valued at £1 million or more.
However, because key inheritance tax allowances haven’t been adjusted for inflation – they remain frozen until at least 2026 – this is having a huge impact on families at risk of incurring an IHT liability.
Those affected by IHT can now expect to pay more. Other families, who never thought IHT was something they’d have to worry about, will also be dragged into the net.
All told, it’s forecast that families will pay £37 billion in inheritance tax over the next five years.
What does this mean for you?
It will be a priority to have an accurate figure for clients’ estates on record, and to revisit their estate planning. And where clients need to plan, it will pay to have Business Relief in mind.
Why is that? And how can you identify situations where Business Relief should be a consideration?
Let me explain.
What is Business Relief?
Business 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 BR-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 BR 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 BR-qualifying investment, they are not the only ones. Read on to see how BR 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 BR-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 last year found that 80% of advisers we surveyed felt their clients have become more mindful, compared to five years ago, of potentially needing access to their money in later life.
With the return of high inflation since that survey, the cost-of-living crisis should have only increased clients’ concerns about how much of their wealth they might need to keep hold of in later life.
One of the advantages of a BR-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
BR-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 BR, 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 BR-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 BR-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 BR-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 BR-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 BR and therefore be zero rated for IHT.
As noted earlier, BR-qualifying investments put a client’s capital at risk.
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 BR-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.
Come to your local Octopus Live 2022
Our popular estate planning seminars are back on the road!
We’ll be running 21 events across the UK this summer, where you can find out more about estate planning in 2022. As well as refreshing your knowledge of IHT, we’ll help you identify clients who could benefit from a conversation about inheritance tax, and we’ll cover key inheritance tax planning strategies, including the use of Business Relief.
BR-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. This article does not constitute advice on investments, legal matters, taxation or any other matters. 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: May 2022. CAM011987.
 Research conducted by Octopus and Vouched For via an online survey of 714 financial advisers in January 2021.