09th December 2016
Inheritance Tax Planning using ‘Business Property Relief’ (BPR)
There is now more Inheritance Tax being collected than ever before by HM Revenue and Customs. The Office for National Statistics has shown that Inheritance Tax receipts from March 2015 to February 2016 totalled a record £4.6 billion.
There is now more Inheritance Tax being collected than ever before by HM Revenue and Customs. The Office for National Statistics has shown that Inheritance Tax receipts from March 2015 to February 2016 totalled a record £4.6 billion. This is a 21% increase on the tax collected in the 12 months prior to this. The Treasury also expects annual inheritance tax receipts to continue to increase in future years, even taking into account the introduction of the new ‘Residence Nil-Rate band’ from April 2017.
Business Property Relief (BPR) is a way of obtaining inheritance tax relief on ones investments. This relief has actually been around since 1976 as part of Inheritance Tax Legislation. When originally introduced, its main aim was to ensure that a family owned business could survive as a trading entity after the death of its owner without having to be sold, or broken up to pay an Inheritance Tax Liability. Successive Governments have gradually increased the flexibility of BPR so that it is now also an investment incentive for private investors.
BPR is a tax relief that encourages people to invest into trading businesses, regardless of whether they run the business themselves. It specifically rewards investors willing to accept potential additional risk of investing in companies that aren’t listed on the main market of the London Stock Exchange. BPR qualifying investments can be passed on free from inheritance tax upon the death of the shareholder as long as the shares have been owned for at least two years. This compares favourably to the seven years it normally takes for gifts, or settlements in trust, to become inheritance tax exempt.
Clients who are keen to invest in smaller company type investments may find BPR-qualifying investments attractive in their own right. BPR qualifying investments can also complement tax planning that has been carried out by investing into trusts.
It is only certain types of businesses that actually qualify for BPR and these are businesses that carry on a trade, rather than investment activities. Investments in the following shares could qualify for BPR:
Shares in companies that are not listed on any stock exchange
Shares in qualifying companies listed on the Alternative Investment Market (AIM)
Investors are also able to choose from a range of BPR qualifying investments that are managed by professional fund managers who specialise in this area. These fund managers can provide investments that cater for different client requirements, such as portfolios of unlisted companies covering the specific investment objectives of capital preservation, liquidity or growth, in order to meet various investor needs.
Fund Managers can also provide portfolios of AIM listed companies which typically target growth. Once again, not all companies on AIM will meet the criteria to be eligible for BPR, so careful stock selection and portfolio management are essential.
Many people are not aware that their ISA portfolios will be subject to Inheritance Tax upon their death. In 2013 the Government made it possible for investors to hold AIM-listed shares within an ISA investment. As a result of this, ISA’s that invest solely into companies which qualify for BPR can now offer inheritance tax exemption as well as the traditional ISA benefits of Tax Free income and capital growth.
Money that is invested into BPR-qualifying companies is held in the investor’s name. This is unlike assets that have been settled into a trust, or permanently gifted away, as these are then removed from the client’s direct ownership. Therefore shares in BPR-qualifying investments would allow clients, subject to liquidity within the investment, to sell shares and have the proceeds returned to them or have regular withdrawals to meet their changing needs in the future.
BPR-qualifying investments also do not utilise the Nil-rate band. This means that investors can use their £325,000 Nil Rate Band allowance to reduce the inheritance tax charge on less liquid assets, such as their home, which are otherwise difficult to remove from the estate when planning to mitigate inheritance tax.
With life assurance, or Discounted Gift Trusts, there is a medical assessment that needs to be undertaken at the outset. This is not the case when investing into a BPR-qualifying investment. As well as this, if an investor dies before they have held their BPR investment for two years, they are able to leave it to their husband or wife without interrupting the 2 year countdown to inheritance tax exemption and the surviving spouse therefore doesn’t have to start the clock from scratch and wait a further two years for it to become inheritance tax exempt.
Investments that qualify for BPR will not be a suitable choice for everyone, and it is important that clients understand the risks associated with such investments. For example, investments could be made in trading companies that are not listed on a main stock exchange. If these companies then fall in value, the investor may receive back less than they originally invested. It should also be noted that investments in unquoted companies, or those quoted on AIM, are more likely to have a higher level of volatility and liquidity risk than securities on the main market of the London Stock Exchange. As with any investment it should be remembered that there are no guarantees and investors could lose some or all of their money.
The rules regarding the taxation of BPR qualifying investments might change in the future, and, as BPR is assessed at the time a claim is made, there can be no guarantee that a company will remain BPR qualifying. The value of tax reliefs will depend on an investor’s personal circumstances.
NB: a BPR investment is not an appropriate IHT solution in all circumstances. It can provide a regular income and the investor actually needs to spend, or gift away, the income being received otherwise the IHT advantages are reduced.
A BPR investment is only one of a number of Inheritance Tax avoidance solutions we recommend to clients, depending on their individual circumstances. If you would like to learn more about the subject and see how you might benefit from IHT planning specific to your own situation, please contact Nicholas Gray at Raymond James on 01622 691600