Gifting money to family, putting money into a Trust, spending your accumulated wealth are very typical ways that people reduce their exposure to Inheritance Tax (IHT). But are there other ways to achieve the same thing?
One way that will likely achieve greater prominence in the years ahead with the advent of changes to IHT on pension savings is Business Relief (BR).
WHAT IS BUSINESS RELIEF?
Business Relief (previously called Business Property Relief or BPR) is a longstanding relief from inheritance tax. When the shares of a company qualify for Business Relief they can be passed to the next generation free from inheritance tax.
To benefit from the relief, qualifying shares must be owned for at least two years and then they must still be held at the time of the owner’s death.
WHY BUSINESS RELIEF EXISTS
Business Relief (BR) has come a long way since it was first introduced in the 1976 Finance Act. Then, its main aim was to ensure that after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or broken up to pay an inheritance tax liability. Over time, successive governments recognised the value of encouraging people to invest in trading businesses regardless of whether they run the business themselves.
BR is a well-established relief dating back 40 years, however, you should keep in mind that the value of an investment may go down as well as up and investors may not get back what they originally put in. Tax rules may change in the future, and the value of tax reliefs depends on your individual circumstances.
THE TYPES OF BUSINESS THAT TYPICALLY QUALIFY FOR BR
Not every investment or interest in a business will qualify for BR, but BR will typically be available for:
- Shares in an unquoted qualifying company, even a minority holding.
- Shares in a qualifying company listed on the Alternative Investment Market (AIM).
- An unincorporated qualifying trading business, or an interest in one – a partnership, for example.
Most recently, the UK Government’s decision in 2013 to allow AIM-listed shares to be held within Individual Savings Accounts (ISAs) means that investors can now hold BR-qualifying shares within a tax-efficient ISA wrapper.
KEY BENEFITS OF A BR QUALIFYING INVESTMENT
SPEED
Making gifts or settling assets into trust usually takes seven years to become completely free from inheritance tax. But an investment in a BR qualifying company can be passed down to beneficiaries free of inheritance tax on the death of the shareholder provided it has been held for at least two years at that time.
ACCESS & CONTROL
Owning BR-qualifying shares allows a client’s wealth to stay in their own name.
BR qualifying investments do not use the nil-rate band.
This means investors can plan for their nil rate band allowance to reduce the inheritance tax charge on less liquid assets, such as their home, which are otherwise difficult to place outside of the estate for tax purposes.
WHAT ARE THE RISKS?
CAPITAL IS AT RISK
To qualify for BR, a company must not be listed on a main stock exchange. Such companies could fall in value, and investors may get back less than they invest.
TAX RULES & RELIEFS CAN CHANGE
Tax rules could change in the future. The value of tax reliefs will depend on an investor’s personal circumstances. There cannot be any guarantee that companies that qualify today will remain BR qualifying in the future.
SHARES COULD BE MORE VOLATILE & LESS LIQUID
Investments in unquoted companies or those quoted on AIM can fall or rise more sharply than shares in larger companies listed on the main market of the London Stock Exchange, and may be harder to sell.
SHOULD YOU CONSIDER BR AS PART OF THE PORTFOLIO
This very much depends on your appetite for investment risk, your desire and willingness to save or reduce your exposure to IHT, your life expectancy and your need to be able to access capital in the future.
If you would like to know more please contact NBL to book a call or make an appointment.
