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Jessica Franks, Head of Tax at Octopus, outlines the advantages of Business Property Relief and outlines the types of client for whom it might prove a useful financial planning and tax tool.
Research published by Octopus earlier this year found that 89% of advisers surveyed reported their clients have become more mindful, compared to five years ago, of potentially needing access to their money in later life[1].
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.
Why 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 ‘deathbed planning’ and consider it for very elderly clients who have not done as much estate planning as they should have, or for clients who are in ill health.
While such clients could indeed benefit by making a BPR-qualifying investment, because BPR allows a client to retain control of their assets, they are not the only clients who could benefit. 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 investor 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.
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 their business (or their stake in the business) though, they will likely create an inheritance tax liability. However, if they use 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 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. And unlike strategies that rely on life assurance, there is no underwriting and no 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 so cannot be guaranteed.
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 asset. Once they have held the new ISA for two years, it should be zero-rated for inheritance tax.
Please remember, an ISA that qualifies for BPR is likely to be higher risk than more mainstream stocks and shares ISAs.
Clients who have inherited a spouse’s ISA
Since April 2015, surviving spouses of ISA investors have been able to make additional ISA subscriptions by being given a one-off incremental ISA allowance equivalent to the value of their spouse’s ISA when they died. This extra ISA allowance is available to a surviving spouse whether they inherit their spouse’s ISA or not.
A client who inherits their spouse’s ISA can use this additional permitted subscription to invest some or all of the value of the spouse’s ISA into an ISA that invest in BPR-qualifying shares.
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 this would not be a chargeable lifetime transfer.
The risks
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. Tax relief depends on the companies they invest in maintaining their BPR-qualifying status.
The shares of unquoted and AIM-listed companies can go up and down in price by more 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
Tune in to the Octopus Online Show on Thursday 5 November at 10am for a tax planning special.
We’ll be looking at areas of opportunity in advisers’ client banks and how tax-efficient investments can help clients in a variety of situations.
You’ll also hear from other financial advisers about the role these types of investments pay in their own clients’ planning.
For more information, and to reserve your place, CLICK HERE.
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: October 2020. CAM010244.
[1] ‘Unlocking estate planning: How Business Property Relief is opening doors for advisers’, Octopus Investments, February 2020
