For professional advisers and paraplanners only. Not to be relied upon by retail investors.
By Jessica Franks, Head of Retail Investment Products at Octopus Investments
The residence nil rate band (RNRB), which is worth £175,000 for an individual, tapers for larger estates. Let’s consider how you might advise a client whose estate is above the £2 million RNRB taper threshold.
Meet Eve, who wants her estate to be able to claim the full RNRB. Eve is 81. She’s widowed, with two children and four grandchildren. Her estate is worth a total of £2.8 million. Eve’s estate loses £1 of RNRB for every £2 by which it exceeds the taper threshold. If her estate was below the taper threshold, her total RNRB would be £350,000 (her own £175,000 allowance plus her late husband’s allowance which passed to her when he died).
Eve could make a lifetime gift of £800,000, which would immediately solve the RNRB problem. However, she is not ready to give up such a large part of her estate. Plus, further inheritance tax would be payable if Eve died within seven years.
Using Business Relief to plan for inheritance tax
Based on a review of her situation and attitude to risk, Eve’s adviser suggests making a Business Relief-qualifying investment.
A BR-qualifying investment can be passed on free from inheritance tax once it’s been held for two years and at the time of death. The investment stays in the investor’s name, meaning they can sell it later on should they want to access the capital.
Inheritance tax relief is available on qualifying investments to compensate for some of the risk of investing in smaller businesses.
Being able to make withdrawals is subject to liquidity and can never be guaranteed. Qualifying shares may be harder to sell than shares listed on the main market of the London Stock Exchange. Their value can also be more volatile.
BR-qualifying investments put capital at risk. The value of any investment, and any income from it, can fall as well as rise, and investors may not get back the full amount they put in.
There are tax risks Eve must consider too. Tax treatment depends on individual circumstances, and tax rules could change in the future. Companies invested in need to maintain their qualifying status.
Having considered the benefits and risks, Eve decides to invest £800,000 in a BR-qualifying portfolio. By making this investment, Eve will be backing some UK companies with the potential for growth. And once she has owned the shares for two years, she will know that as long as she continues to hold them, they will pass free from inheritance tax, saving £320,000 at the current valuation.
Settling a BR investment into trust
While BR-qualifying investments that have been held for two years are zero-rated for inheritance tax, they still count as part of the estate when working out whether the RNRB taper threshold applies.
Four years later, Eve agrees with her adviser that she’s happy to give up ownership of some of her assets. Because she’s held her investment for more than two years, it should be zero rated when she dies, saving £320,000 of inheritance tax. If she settles it in to discretionary trust, there would be no chargeable lifetime transfer (typically 20% above the nil rate band) and doing so would immediately bring the value of her estate to £2 million, allowing it to claim the full RNRB allowance. This would save a further £140,000 of tax.
Learn more
To learn more and to explore other planning ideas, visit https://octopusinvestments.com/client-planning/
This blog does not constitute advice on investments, legal matters, taxation or anything else.
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: November 2022. CAM012540.
