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Inheritance Tax Planning - Business Property Relief

Gresham Wealth

Last month we held the latest of our Professional Masterclass series, this time focusing on Inheritance Tax. With this in mind, we thought it would be fitting to cover this topic in a blog post.

Whilst the majority of clients are aware of the benefits of Inheritance Tax Planning as they approach later life, there are some often overlooked circumstances, in particular in relation to Business Property Relief, in which forward planning would also be advisable.

Here we provide a rundown of eight different scenarios where Business Property Relief offers a considerable Inheritance Tax benefit. For further advice on this or any aspect of wealth management, please contact us.

1. Clients that own their own company

Where a company holds significant non-trading assets, such as cash, its entitlement to Business Property Relief can start to become restricted or else completely removed. Some investment options offer BPR-qualifying investments that allow companies to invest surplus cash therefore restoring valuable tax reliefs.

2. Clients who want to set up a discretionary trust

Clients who place assets in excess of the nil-rate band into a discretionary trust will be immediately subject to a lifetime transfer charge of 20%. However, if a client has held an investment which qualifies for business property relief (BPR) for at least two years, they are able to set up a trust without incurring any such charge. Trustees who want to plan for periodic or exit charges could also benefit in the same vain.

3. Clients subject to power of attorney

Where a lasting power of attorney is in place, the ability to make gifts is very limited without approval from the Court of Protection. Placing funds into a BPR qualifying investment does not involve a transfer of ownership and shares remain the property of the investor.  This can prove an effective way of passing assets on to the next generation.

4. Clients that are selling / who have recently sold a business

When business owners sell their business they effectively move wealth from a BPR qualifying asset to a non BPR qualifying asset. This means that assets that were previously exempt from Inheritance Tax (IHT) become part of the taxable estate and will be subject to inheritance tax if they remain held as cash or other taxable assets at the time of death. To address this the proceeds of sale can be reinvested into investments that qualify for business property relief (BPR). This places them immediately out of the estate for Inheritance Tax (IHT) purposes. This reinvestment can take place up to three years after the sale of a BPR-qualifying business.

5. Clients with existing loan trusts

Any growth in the value of trust property will immediately fall outside of the estate of the holder and is therefore free from inheritance tax. However, the initial loan capital loan is not. However, if the initial loan capital is repaid and reinvested into a BPR qualifying investment this amount  would become exempt for IHT purposes provided the investment is held for a two year period.

6. Clients who want to keep control over their money

For a variety of reasons clients are often reluctant to transfer control of an asset to family member / beneficiary. Investment into a BPR qualifying asset is extremely flexible and tax efficient. This is because investment does not result in a transfer of ownership which allows them to retain control, maintain access and the ability to benefit from the investment whilst addressing their Inheritance Tax liability.

7. Immediate post death interest trusts (IPDI)

The property from an IPDI trust will form part of the estate of the life tenant when they pass away, often leaving them little or no inheritance tax nil-rate band for their own estate. Effective investment of the trust will be exempt it inheritance tax after two years. This will allow the client’s nil-rate band to be used against other assets in their estate.

8. Don’t discount investments if clients are in poor health…

There are a number of products on the market that become exempt from inheritance tax after just two years, if held at time of death. If in any doubt, speak to a financial advisor at the earliest opportunity.

For more information or advice on any aspect of this article, please don’t hesitate to contact us.

NB. Tax Planning and Trusts are not regulated by the Financial Conduct Authority.

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