IHT planning has never been more necessary, says Dan Jewell of Triplepoint.
With Inheritance Tax (IHT) receipts on the rise, inflation soaring and property prices enjoying strong growth over the past two years[1], there has probably never been a greater need for families to implement sound IHT strategies. One key estate planning solution is investing in assets that qualify for Business Relief (BR). BR enables clients to gain IHT relief quickly without a loss of control over their investments. Diversification of these BR qualifying investments is key to reducing risk.
Rising inflation and house prices key factors in driving up IHT
Recent data from the Office of Budget Responsibility (OBR)[2] shows that IHT receipts in the 2021-22 financial year rose 13% to £6.1 billion, with receipts forecast to grow 9.8% this year. Rising inflation is a key factor here with the Bank England recently warning about the prospect of inflation reaching around 10% later this year[3], up from 7% in March.
In addition, house prices have been rising fast. The nil-rate band, covering assets below £325,000 after which the IHT rate jumps to 40%, is frozen until at least 2026, and the so-called ‘residence nil-rate band’, which is only applicable when a person passes on their main residence, or the sale proceeds of their former residence, to their children or grandchildren, is set at a maximum of £175,000[4]. This can be added to the existing nil-rate band, meaning the overall IHT allowance can increase to £500,000. However, rising house prices, in particular, have meant that more and more estates are crossing the £2 million threshold – at which stage the residence nil-rate band is tapered off. This has contributed significantly to the rise in IHT bills.
Key estate planning solution is Business Relief
What’s clear is that with the ever-growing IHT charge more and more clients will be seeking a range of effective estate planning solutions. BR is an established estate planning tool which can enable clients to gain IHT relief quickly without a loss of control for the investor over the investment. It is available for: shares in an unquoted qualifying company; shares in a qualifying company listed on the Alternative Investment Market (AIM); and an unincorporated qualifying trading business, such as a partnership. Providing qualifying assets have been owned for at least two years and at the point of death, they can then be passed on completely free from inheritance tax.
Investors seek predictable returns
Spreading your money between different types of asset classes and sectors is the best way to target steady returns and mitigate unpredictability. Diversification offers investors key benefits by spreading risk and limiting exposure to any single asset. With a larger number of clients seeking IHT relief, diversification should be a key consideration within a BR qualifying investment portfolio to protect the long-term health of clients’ savings.
Just like a traditional investment strategy, building a diversified BR portfolio is the best way to mitigate risk. Given the importance of this issue for advisors, Triple Point has developed a sector tool that demonstrates the levels of sector diversification offered by unlisted BR providers. The tool is a great way of highlighting how a client’s BR portfolio can be spread across different sectors and asset types.
For example, while most BR-Unlisted providers focus on the trades of renewables and infrastructure, Triple Point is the only provider to offer leasing as a BR qualifying investment. This makes it a natural complement to other providers. Triple Point’s Private Credit team organises funding for both the public and private sector and support a diverse range of counterparties from large corporates, local authorities and housing associations, to tens of thousands of UK SMEs. In recognition of the strength and range of activity, Triple Point was recently named No.3 in the Top 10 list of UK debt providers in MarketIQ M&A Review (Q1 2022).[5]
There are more and more people facing larger IHT bills today. The good news is the range of legitimate options available to shrink or annul their liability. BR is an established estate planning solution, yet clients should be cognizant that building a BR portfolio should be approached with the same awareness, rigour and diligence as any balanced investment strategy. BR in the form of leasing and lending represents a true diversifier for a client’s portfolio; it can benefit clients and help the UK economy to build back better.
[1] https://uk.finance.yahoo.com/news/uk-house-prices-record-high-mortgages-outpace-rents-230111177.html
[2] https://obr.uk/docs/dlm_uploads/CCS0222366764-001_OBR-EFO-March-2022_Web-Accessible-2.pdf (p101)
[3] https://www.reuters.com/world/uk/bank-england-set-4th-straight-rate-hike-fight-inflation-2022-05-04/
[4] https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
[5] https://www.experian.co.uk/content/dam/marketing/uki/uk/en/pdf/experian-miq-ma-report-uk-roi-q1-2022.pdf
