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Weigh up your options with BPR qualifying investments

The Government’s decision to freeze the inheritance tax nil rate band until 2015 will create new liabilities for a number of families.

The Government’s decision to freeze the inheritance tax nil rate band until 2015 will create new liabilities for a number of families.

The tax can significantly reduce the amount that can be passed from one generation to the next and a worrying number of people make no effort to reduce their exposure.

There are a number of tax planning approaches that can be used to mitigate against inheritance tax (IHT) and this column has previously discussed some of the more common ones.

Individuals whose estates could potentially be subject to significant IHT charges should be aware of the planning opportunities surrounding business property relief. This can provide a viable alternative to some of the more traditional trust arrangements.

Business property relief (BPR) was introduced during the late 1970s in order to allow the passage of privately owned businesses from one generation to the next without a liability to IHT. Nowadays the relief can be applied to a broader range of scenarios, in order to reduce the tax payable on an individual’s estate in the event of their death.

When most people think about reducing their exposure to inheritance tax they will consider paying a sum of money into trust. The payment of money into such an arrangement will often constitute a potentially exempt transfer. IHT exemption is therefore contingent on the donor surviving for seven years.

With BPR the sum of money will be IHT exempt after just two years.

In most instances the investor will continue to benefit from any capital appreciation and will be able to draw an income. In addition, should the individual die within the two-year period before full relief is granted, the investment can be passed to their surviving spouse or civil partner. Such a transfer of ownership would not reset the two-year clock.

There is a range of different investments that interact with BPR in this way. One example is an enterprise investment scheme (EIS) – a type of collective investment which invests exclusively in the unlisted companies that attract full relief after two years.

EIS investments of up to £1 million will also be subject to 30 per cent tax relief in the current tax year.

Octopus are a company that specialise in investments of this type and have considered a number of scenarios where they might provide an appropriate solution.

Primarily they take the example of a 60-year-old business owner who finds herself forced to sell the company following diagnosis of a terminal illness. The sale of shares in the business would create an inheritance tax liability on death and she is worried that this will reduce any bequests made to her children.

The proposed solution is for the individual to sell the shares and invest the proceeds into a BPR qualifying investment. Provided that the entire sale proceeds are invested into such a scheme BPR would render them exempt from inheritance tax, even if she were to die in the near future. The second example concerns a husband who is concerned that his wife would not be left with adequate income in the event of his death. He decides to create an immediate post-death interest trust in his will. This would provide his wife with an income and provide a capital sum for their children when she eventually dies.

The main limitation of this approach is that on the wife’s death the value of the trust and that of her estate will be combined and subject to IHT. However by investing the trust into a BPR qualifying arrangement, IHT relief will be granted if the wife survives her husband by at least two years.

The opportunities afforded by BPR qualifying investments should therefore be considered by individuals looking to reduce their IHT exposure. They are also a useful tool in the deferral of capital gains tax.

However the nature of the unquoted companies held within enterprise investment schemes means that any investment decision should be taken after a consideration of an individual’s attitude to investment risk.

* Trevor Law is a director with Merito Financial Services, financial planners, based in Solihull.

E-mail: tilaw@meritofs.com

 

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