Overcoming a client’s objections to planning for inheritance tax

6 June 2021

Sponsored article

Jessica Franks, Head of Tax at Octopus Investments, explains how one estate planning option can unlock client conversations.

The next Octopus Estate Planning Show is on 15 & 16 June. You can Register Here.

If a client has an objection to planning for inheritance tax, often that will be either a reluctance to give up access to wealth in their lifetime, or a concern about surviving seven years.

It’s common for people to think about their estate later in life. But when a client is elderly or in poor health, it’s less likely a lifetime gift will work as intended, because they need to survive the seven-year taper. That can lead some clients to believe they’ve left it too late to plan their estate.

The simple answer would be to put planning in place sooner. But the younger a client is, the more likely that client will be concerned about access and control of their wealth.

Making lifetime gifts puts capital permanently out of reach. So even when a client is shown, with the help of cash flow modelling, that they can comfortably afford to make gifts from their estate, it’s natural for clients to feel uncertain.

How might advisers overcome these challenges?

Business Property Relief

One option is Business Property Relief (BPR). Investments that qualify for BPR can achieve faster relief from inheritance tax relief, and they allow an investor to keep wealth in their own name.

BPR 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 lifetime gifts to become fully exempt. Because it’s an investment, clients also keep wealth in their own name and can request access to their capital.

Let’s cover some client scenarios where BPR could help clients who are comfortable with the additional risks of the investment.

Clients looking to achieve their goals in a shorter timeframe

As mentioned earlier, gifting can require a client to survive seven years for the amount to be fully exempt from inheritance tax.

While many like the concept of gifting, it can be difficult to be sure how long you will live. The pandemic has no doubt heightened these anxieties.

Business Property Relief (BPR), in contrast, should offer relief from inheritance tax within just two years, provided the client holds the investment until their death.

Clients who want keep capital in their own name

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 is irreversible and cannot be accessed.

Clients with a Power of Attorney in place

BPR-qualifying investments may also be a suitable where gifting or trust transfers are restricted or prohibited under Court of Protection rules.  That’s because investments remain in the donor’s name. And unlike strategies that rely on life assurance, there are also no underwriting or medical forms to complete.

Withdrawals can be requested at any time, for example if the donor needs additional funds for care home fees. However, withdrawals are facilitated by the sale of shares and cannot be guaranteed.

Business owners looking to sell their business

If a client owns their own business (or a stake in one) and its activities meet the qualifying criteria for BPR, they should be able to pass on their shares in the business free from inheritance tax when they die.

But if they sell some or all of their business, the proceeds would be subject to inheritance tax when they die. 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 immediately zero-rated for inheritance tax.

Clients with large ISA portfolios

ISAs offer valuable tax benefits during a client’s lifetime, but they are subject to inheritance tax.

A client can choose to transfer some or all their existing ISA investments into an ISA of BPR-qualifying shares. By doing so, they retain the tax benefits of their ISA, as well as control of their capital. 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. It can immediately trigger a charge of 20% on the amount settled that exceeds a client’s nil-rate band.

An 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 inheritance tax.

Risks to bear in mind

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.

Learn more at The Estate Planning Show

Tune in to The Estate Planning Show, a two-part online event on Tuesday 15 June and Wednesday 16 June at 10am.

The show will help you spot opportunities and turn them into planning. Last year’s show was watched by thousands of advisers – don’t miss it!

For more information, and to reserve your place, go to octopusinvestments.com/estate-planning-show/

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: May 2021. CAM011052

Professional Paraplanner