BUSINESS RELIEF

Devin Smith – Chartered Financial Planner – 29th July 2020

Your client has sold their business – great news! They have secured an above market price and the cash has recently arrived in their bank account. While this money has now alleviated any day-to-day financial concerns, it’s created potentially a new problem for the next generationInheritance Tax (IHT). 

You may be considering the potential held in gifting out of the estate or even insuringthrough life cover, against the future IHT liability. But have you considered Business Relief? 

 

In the 1976 Finance Act, the government introduced Business Property Relief (known now as Business Relief), to encourage the transfer of business to the next generation without any inheritance tax bills. Over time, successive governments have recognised the value of broadening the definition of qualifying businesses, meaning individuals can purchase certain types of shares and receive the same IHT benefits of business owners. 

Business relief (BR) is granted as long as the investor has held the investment for at least 2 years, still holds it on death and the investment has retained its qualifying status as relevant business property. Qualifying status is mainly determined by the size of the business and the type of business trade. We work with other investment professionals to ensure that current regulations are adhered to. 

Holding qualifying investments can mean faster tax exemptions. A typical gift from an estate is subject to the seven-year rule, whereas BR qualifying investment will be exempt from IHT after two years, provided they are still held at death. This is due to the lack of ownership change; no gift has been made and therefore gifting rules don’t apply. Married couples and civil partnerships are also able to continue a joint two-year qualifying period through a transfer of the asset on death, without resetting the two-year clock. 

Qualifying investments are also accessible to investors, either to the capital or to income in some cases. Investors also have control over how the money is invested, within qualifying rules. These investments may include shares on the Alternative Investment Market (AIM) or proprietary investment products. This accessibility may be more suitable to investors who are worried about giving money away with no further means of relying on that money in the future. 

However, there are risks, and part of our job as Financial Planners is identifying these as they relate not only to your client’s personal situation, but also to the BR investment itself. 

These are high risk investments and therefore carry the risk of losing capital. This means that the investment solution may not be appropriate for all clients. Our job is to get to know your client and determine whether the investment is appropriate. Some BR investments are potentially lower risk given their broad diversification, but the risk of capital loss does not disappear. Assuming however that the qualifying criteria is met, a potential loss of capital value is cushioned by the 40% savings in IHT to some extent.  

While some BR investments do provide an income, these are in the form of dividend payments and just like dividend payments in the main stock market listings, these payments are not guaranteed. To rely on this income may be a risk too far for some.  

Past performance is no indication of future performance. 

In addition to the capital risks, there are liquidity risks through some BR investment products and these need to be explored and discussed with clients to ensure they are acceptable within the broader lifestyle objectives. The liquidity risks of accessing your capital through the qualifying investments on the AIM markets are smaller, but these investments tend to be more volatile. The less volatile proprietary investments will rely on the creation of secondary markets that are not frequently traded, meaning your clients may not actually be able to access their capital on demand. As Financial Planners, we spend a lot of time researching the BR investments on offer, rating their capital and liquidity risks before making a personalised investment recommendation. 

Finally, like any investment that has comes with a tax incentive, it’s a potential change of legislation which may affect the qualifying status of current investments or remove BR altogetherPart of the reason for the tax incentive is to encourage investment and support of these smaller businesses and the government has indicated they would continue investment in these areas (but they can be prone to changing their minds, of course!) Once again, we work with BR investment fund managers who have the flexibility to adapt and ensure their investment choices remain qualifying therefore ensuring the IHT exemption remains in place for investors. 

Business Relief is a very effective means of reducing potential IHT bills with a lot of benefits and those who have sold businesses may accept the investment risk, or those with underlying health issues may appreciate the shorter time span to IHT effectiveness. Due care should still be taken because of the risks, but as part of a wider IHT planning exercise, there is no reason why BR should not play a part. 

 

This blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions and should be considered as guidance and not advice.  It is important for all individuals examining their pensions to seek expert financial advice from a regulated financial adviser.  Solicitors should be cautious when examining pensions with their clients as it is easy to stray into the area of regulated financial advice.  None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. 

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