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Octopus sat down with the Mark Greenwood, Director of Compliance Services at SimplyBiz, to discuss recommending inheritance tax-efficient investments.
If you’re new to the world of investments that qualify for Business Property Relief (BPR), what are some practical steps you can take when considering this kind of investment?
In an Octopus Online Show last year, we spoke to Mark Greenwood, Director of Compliance Services at The SimplyBiz Group, the largest provider of compliance support for financial services in the UK.
BPR explained
“Historically tax-efficient investments like BPR were seen as non-mainstream” says Mark Greenwood. “But over the years we’ve seen an increase in business written in these areas.”
“Advisers are looking to go beyond the basic standard of planning for clients. And that’s where these kinds of solutions tend to come into play.”
So what is BPR?
BPR-qualifying investments encourage individuals to invest in unlisted trading companies, or those listed on the Alternative Investment Market (AIM). These are higher risk investments than main-market equities. To compensate for some of that risk, the estate of an investor can claim 100% relief from inheritance tax, as long as shares had been held for at least two years when the investor died. As this is simply an investment, unlike other forms of estate planning there is no need to give away wealth while alive. The qualifying shares are held by the investor until they die meaning they retain control of their wealth, and should they need to sell some or all of their investment to access their capital, they can do so, subject to liquidity.
Making a qualifying investment can be effective more quickly than traditional estate planning options, such as lifetime gifts, which can take seven years to reduce the value of an estate. Being able to make investments that support trading businesses and that provide relief from inheritance tax has made BPR qualifying investments a compelling option for many clients planning their estate.
Despite the growing popularity of BPR-qualifying investments, it can be perceived as a daunting area to get to grips with. So here are three helpful pointers from a compliance expert.
1. Get to know Business Property Relief
“Knowledge is everything,” says Mark. “For some advisers, if they’re not familiar with Business Property Relief there can be a fear factor.”
“Once they get to understand the investments, that fear dissolves.
“Not having the knowledge is not an excuse. For the right client, BPR should be being discussed.
“I would think in most adviser’s client banks there will be clients where tax-efficient investments like BPR are quite likely to be appropriate.
“BPR isn’t for every client. But advisers should be looking at it, even if it’s to discount it for a client. It’s far better to have the knowledge, look at BPR, and decide that actually for this client it’s not the way to go.”
2. Adopt a goal-based risk approach
“There are a few areas that are consistently fed back on by the SimplyBiz file review team,” says Mark.
“Unsurprisingly risk is up there.
“The tax benefits of BPR are compensating for some of the risk. But it’s not always clear in the client file that the client has an understanding of the risks.
“There’s a bit of an obsession around the tax benefits – which are fantastic – but our file review team would be looking to see that the adviser has addressed attitude to risk, capacity for loss, and how that impacts the recommendation within the case.”
It’s worth recapping the risks here.
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. Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies maintaining their qualifying status.
The shares of unquoted companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
Approaching risk can be particularly challenging where a client has a relatively low appetite for risk overall, but is perhaps suitable for BPR. Yet advisers should not necessarily be deterred.
“You’ve got two factors here. What proportion of a client’s assets are being recommended to go into a BPR investment? That’s a factor. Then there’s having a goal-based risk approach.
“A client can have different tranches of money at different ‘speeds’ from a risk perspective. And the file needs to clearly articulate that.
“The FCA picked up on this in their first assessing suitability report in 2016,” says Mark. “The FCA noticed there was a pattern in some cases where it wasn’t clear from the file whether the attitude to risk and the capacity for loss was for a particular tranche of money or for the client’s overall assets.
“If a client is a 6/10 for risk overall, and you have a solution that’s 9/10, if there’s no narrative around that then you’re looking at the case and saying that doesn’t seem to fit.”
3. Be thorough when documenting suitability
“It needs that extra level of documentation,” concludes Mark. “Make it clear that for this particular tranche of money, for these reasons, a client is going to be taking more risk than the rest of their portfolio.”
“With BPR cases, you’ll want to have an accurate inheritance tax calculation on file too. And an ‘after inheritance tax’ calculation to demonstrate the impact of the advice.”
Next steps
You can find a range of education material and an inheritance tax calculator on the Octopus Investments website.
To watch our full interview with Mark Greenwood, and to catch the rest of the Octopus Online Show on tax-efficient investments 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: January 2021. CAM010599.
