• Individuals seeking an investment qualifying for Business Property Relief after two years.
• Ideally suited to those with a life expectancy of less than seven years.
• Looking for the estate to make Inheritance Tax savings after a relatively short period and achieving modest capital growth or income for the duration of the investment.
• Individuals with the appropriate investment risk profile, knowledge and experience of complex investment structures.
Inheritance Tax (IHT) is levied on a person’s estate when they die, and certain gifts made during an individual’s lifetime.
At present, the first £325,000 of an individual’s estate is taxed at 0% this is referred to as the nil rate band and is effectively tax-free. The excess estate over the nil rate band is taxed at 40% on death and chargeable lifetime transfers are taxed at 20%.
For the excess value of an individual’s estate beyond the nil rate band there are various methods of mitigating IHT liability. Generally these make use of the personal allowances and exemptions available and the use of Will and trust planning, and more recently the use of residence nil rate band where applicable.
In addition to these areas of planning, Business Property Relief (BPR) introduced in 1976, was designed to allow family businesses to be passed down through the generations unhindered by inheritance tax. Shares in BPR qualifying companies are deemed to be exempt from inheritance tax if they are held for just two years and at the time of death. This relief is now used widely by investment managers in products that can complement other estate planning solutions such as trusts and gifts.
BPR applies to relevant business assets such the outright ownership of a business or an interest in a business e.g. a partnership, securities in a company which is unquoted and which gave the transferor control of the company immediately before the transfer, or shares in unlisted companies or those traded on the Alternative Investment Market.
To qualify for business property relief, the relevant business property must have been held by the transferor for two years immediately prior to the transfer. If the transferor dies within the two years following the purchase of the property then the property will not qualify for BPR and IHT will become due on the value of the property at the date of death.
There are various schemes which aim to utilise BPR. Typically these schemes offer the investor the opportunity to invest funds into a corporate or partnership structure which will in turn deploy the funds into a qualifying trade or make investments into qualifying unlisted companies with the aim of the investor’s holding qualifying for BPR after the two year initial period.
The investment strategy of these schemes tends to focus on capital preservation rather than high returns which would bring extra levels of risk in order to maintain the investor’s level of capital through the minimum holding period.
An example of how BPR could be utilised is as follows:
An individual aged 75 years has total assets including main residence, investments and savings of £825,000 and wants to consider ways of mitigating his estate’s liability to IHT. Of the total assets there is an amount of £200,000 which is liquid and available for investment.
The table below shows the potential IHT liability reduction available through using these funds to make a BPR investment:
You can download the PDF here.
This summary sheet is purely for illustration purposes and does not constitute an invitation to participate. Any illustrations are not conclusive and do not cover many aspects of these structures. Under no circumstances should an individual consider this a recommendation, nor should they use this summary as an indication as to the potential for participation. The value of investments may fall as well as rise. You may receive back less than the original investment. Any decision to participate should be made with the help of appropriate tax advice.