What is it?
Inheritance tax is chargeable at the flat rate of 40% on all of your assets outside of those exempted. The exemptions available are your Nil Rate Band of £325,000 (£650,000 for a married couple), along with the possibility of the new Residence Nil Rate Band which was introduced in April 2017 if you meet certain qualifying conditions. There are various gifting allowances available, which include any number of individual gifts of up to £250, or up to £3,000 worth of gifts in each tax year – the annual exemption, or gifts out of income.
Inheritance tax can therefore significantly decrease the assets you are able to pass on to your loved ones.
When it comes to Inheritance Tax planning, after ensuring you have made a valid Will, the next step should be to utilise the secure exemptions, allowances and reliefs available to you.
One of the reliefs that is available for you to take advantage of is Business Relief (formerly Business Property Relief – BPR), which was introduced in 1976. It is an inheritance tax (IHT) relief that has steadily grown as a more mainstream option in recent years. It is a tax relief provided by the UK Government as an incentive for investing in certain qualifying businesses, such as renewable energy projects and lending to certain businesses. Business Relief (BR) delivers full exemption from IHT on qualifying investments once you have owned them for two years.
BR was designed to ensure that family businesses can be passed down the generations without being sold or broken up to pay tax. Over the years there have been numerous changes to the finer points of the BR regulations but the broad principle has always been that ‘relevant business property’ will receive full relief from inheritance tax (IHT).
In its early days, BR was used predominantly by people who had businesses of their own. But a new market subsequently emerged which is designed to give a broader range of retail investors access to BR-qualifying products run by professional fund managers.
This is achieved by investing your money into carefully selected trading companies which are likely to qualify for Business Relief.
Can anyone invest?
Anyone can invest in Business Relief Inheritance Tax solutions. The solutions we are focussing on within this article seek to preserve your capital; the managers invest with inheritance mitigation as their key priority and do not therefore take any excess risk with your money.
How risky is it?
As well as the benefits for you, there are important rewards for the economy, as qualifying investments are in Small and Medium Enterprises, an underfunded yet critical part of the UK economy. Of course investment into SMEs is by its very nature deemed as high risk, so how do we make this a viable investment for the more cautious and potentially older investor, and how do we mitigate the risks involved? We carry out stringent due diligence on the company and its’ accounts, and meet the managers that are actually investing the money, as well as their support teams, maintaining a close working relationship with them. From the whole of market research, we create a panel of our preferred providers, which invest in different areas within the spectrum of qualifying trades. We always recommend a minimum of three providers services for each client, these have different portfolios consisting of varying investments, with different target returns, and this method provides diversification across providers and investments and decreases the downside risks of investing. We have been investing in BR since it became a more mainstream investment solution for our clients and long enough to have many clients through their 2-year qualifying period. The solutions we have used have all delivered their targeted returns, and those past the 2-year period now have the value of their original investment plus capital growth exempt from inheritance tax. It can have a valuable place as part of your overall portfolio, or you may have certain assets which you can set aside with a different objective, that of reducing the inheritance tax liability on your estate for your loved ones.
What are the advantages?
BR based investments can offer a number of benefits compared to traditional IHT planning (such as trusts). These benefits include:
Strategy to preserve capital
Ownership and Control
Your capital is under your control and remains yours. You retain access to your investment, and if your circumstances change and you want to dispose of your holding and get your money back, you can. However, money taken out of the investment may not be sheltered from IHT.
Faster 100% IHT exemption
Unlike gifts and simple transfers into trust, which generally take seven years before they are fully exempt from IHT, BR qualifying investments are exempt after just two years (provided the investments are held at the time of death).
You are able to access your money via regular income or ad hoc withdrawals, it is flexible. Alternatively if you do not require an income any growth will increase the value of the investment.
Investment solutions that seek to take advantage of BR are typically simple (compared with trusts). Generally there are no complex legal structures, and there may not be a requirement for client underwriting or medical surveys.
It is possible for Lasting Powers of Attorneys to invest in these products on behalf of the donor, as the assets remain the property of the donor and are not a gift.
It is our policy to ensure your money is spread across providers in order to minimise risk further and provide further diversification across the spectrum of BR qualifying investments.
How much can I invest?
A good place to start is to speak to us as once we have the relevant information from you we can carry out a calculation of your approximate inheritance tax liability. From there we can advise you on making your existing assets more tax efficient. The minimum investment amount for the capital preservation products is generally £25,000.
Can I take income (do I have to?)
Yes, you can take income but should only do so if you are going to spend it! It will otherwise become IHT chargeable again. If you let the income roll up, growth will be added to the amount you invest. The benefit of this is that the increasing investment value will attract Business Relief.
What if I need access to the money?
As mentioned above, the money remains yours and you can withdraw it if required.
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