Death and Taxes
Inheritance Tax has been around in some form since the middle ages, and today raises in excess of £5.4bn making it a significant contributor to the government purse. If your estate is worth more than £325,000 in total, taking into consideration all your assets plus any gifts that you have made in the last seven years over and above your available allowances, then you may wish to carry out a review of your overall estate and seek advice.
In simple terms, Inheritance tax is a tax due on the estate of someone who has passed away. As it currently stands, 40% tax is due on any part of the estate over and above the £325,000 threshold*; this threshold has been unchanged since 2009, and given the compound impact of annual inflation in the last eleven years, not to mention property price inflation, it has been widely suggested that this tax is due for a review.
There are many ways at looking to reduce your potential Inheritance Tax liability some of which are within our Guide to Inheritance Tax, which can be found here: IWS Guide to Inheritance Tax
In this blog we are focussing on Business Relief
Why Business Relief (BR)?
Business Relief is a longstanding inheritance tax relief that can be a useful option as part of someone’s estate planning. Once a BR-qualifying investment is held for two years, it becomes zero-rated for inheritance tax as long as it remains qualifying. If the investment is then held until death and remains qualifying, it can be passed on free from inheritance tax.
This two-year period is significantly shorter than the seven years it typically takes for gifts to become fully exempt. Because of this, it’s common to think of BR as ‘deathbed planning’ and consider it for very elderly people who have not done as much estate planning as they should have, or for clients who are in ill health.
While such people could indeed benefit by making a BR-qualifying investment, because BR allows you to retain control of your assets, it could also benefit you in a variety of different situations.
It’s important to note that this type of inheritance tax planning puts investor capital at risk. The value of a BR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. You’ll find a fuller description of the risks later on in this article.
Business owners looking to sell their business (or who have sold a business within the last three years)
If you own your own business and its activities meet the qualifying criteria for BR, that means you should be able to pass on shares in your business free from inheritance tax when you die.
If you sell your business though, you will likely create an inheritance tax liability. However, if you use the proceeds to buy shares in another BR-qualifying business within three years, those shares should be zero-rated for inheritance tax from day one.
Clients with a Power of Attorney in place
BR-qualifying investments may be a suitable estate planning strategy where gifting or trust transfers are restricted or prohibited under Court of Protection rules. And unlike strategies that rely on life assurance, there is no underwriting and no medical forms to complete.
Withdrawals can be requested at any time, for example if the donor needs additional funds for care home fees. However, withdrawals are facilitated by the sale of shares and so cannot be guaranteed.
Clients with large ISA portfolios
An ISA offers valuable tax benefits during lifetime, but is still subject to inheritance tax along with the rest of your estate.
However, by transferring some or all of your existing ISA into one that’s invested in BR-qualifying shares, you retain ISA tax benefits, as well as control of your assets. Once you have held the new ISA for two years, it should be zero-rated for inheritance tax.
Please remember, an ISA that qualifies for BR is likely to be higher risk than more mainstream stocks and shares ISAs.
Clients who have inherited a spouse’s ISA
Since April 2015, surviving spouses of ISA investors have been able to make additional ISA subscriptions by being given a one-off incremental ISA allowance equivalent to the value of their spouse’s ISA when they died. This extra ISA allowance is available to a surviving spouse whether they inherit their spouse’s ISA or not.
If you inherit your spouse’s ISA you can use this additional permitted subscription to invest some or all of the value of the spouse’s ISA into an ISA that invests in BR-qualifying shares.
Clients looking to settle assets into trust
A lifetime transfer of assets into a discretionary trust is a chargeable lifetime transfer, and can immediately trigger a charge of 20% on the amount settled that is in excess of your nil-rate band.
One alternative could be to invest in BR-qualifying assets, hold them for two years, and then settle those assets into trust. This should not trigger a charge, as although this would be a chargeable lifetime transfer, the availability of 100% BR would mean there would be no immediate IHT charge.
The risks
As noted earlier, BR-qualifying investments put your capital at risk. The value of these investments, and any income from them, can fall as well as rise. You may not get back the full amount invested.
You should also be made aware that tax treatment depends on individual circumstances and tax rules could change in future. Tax relief depends on the companies you invest in maintaining their BR-qualifying status.
The shares of unquoted and AIM-listed companies can go up and down in price by more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
BR-qualifying investments are not suitable for everyone.
At Integrity Wealth Solutions we have a lot of experience in advising clients with substantial Inheritance Tax liabilities. We are also fully independent and can research the most appropriate solutions from the whole of the marketplace.
To obtain a more detailed and personalised understanding of the tax rules as they apply to you, please speak to your usual Integrity Wealth Solutions contact or call us on 02476 388 911. We're here to help 9am – 5pm Monday to Thursday and 8:30am - 4:30pm Friday.
The content here is for general informational purposes only and not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.
*exclusions and increased thresholds can apply in certain circumstances. For example www.gov.uk states “If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000. This is with the inclusion of the Residence Nil Rate Band (RNRB) that is currently £175,000. It is then expected to increase in line with the Consumer Prices Index (CPI) from 2021 to 2022 onwards.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1,000,000 in 2020/21 including the Residence Nil Rate Band of £175,000 each.”
**The Financial Conduct Authority does not regulate some forms of tax advice
Information sourced from - https://www.pwc.co.uk/