Introduced in 1976 Business Property Relief provides up to 100% exemption from Inheritance Tax on death. Only certain assets can secure the relief and the assets must have been held for a minimum of 2 years on death to qualify.
Land, buildings or plant and machinery held in a trust where the deceased had the right to benefit from the trust and the asset was used in a business carried on by the deceased.
For those who own a business, or have a controlling interest, BPR can significantly reduce the IHT liability on death.
However, for those with capital available to invest, opportunity also exists to mitigate potential IHT liability on death whilst retaining access to the capital should it be needed. This can be particularly useful where future living and potential care costs are unknown.
The most widely known form of such investment is in an AIM portfolio which, since the Budget in March 2014, can be held under an ISA. Investment in AIM can be volatile as the companies listed will, by definition, be smaller in nature than those listed on the FTSE for example, however, by selecting a suitable investment manager who stock picks those companies likely to produce more stable returns, rather than chasing high returns as the expense of high volatility (risk) an AIM portfolio can be a valuable solution in IHT mitigation. It should be noted that smaller companies are not necessarily that small, for example, Majestic Wines and Prezzo are both listed on AIM: both have a market cap of over £300million and projected profit for 2014 of over £20million (source: Octopus Investments).
Other IHT solutions available target steady returns of 3 or 4% per annum, with the aim of maintaining the value of the investment in real terms whilst achieving full exemption from IHT after 2 years. Such investments typically invest in areas such as forestry, farming and renewable energy.
In all cases the investments must have been held for at least 2 years in order to qualify for IHT relief and must still be held on death.
Such investments will not be right for all and care must be taken to explore the available options and to understand the potential risks.
What is the minimum investment in AIM or other BPR investments?
Investment in AIM can be as little as £10,000 and in other solutions from £25,000. The amount that is appropriate to invest will depend on your personal circumstances.
How easy is it to access capital if needed?
AIM portfolios are generally liquid and can usually be accessed readily, although this would depend on the underlying shares and market sentiment at the time. With other BPR investments the holdings are not as liquid and withdrawals may take up to three months to complete.
What happens if capital is withdrawn from the BPR qualifying investment and is still held on death?
In this case any capital held outside of the BPR investment would form part of your taxable estate for IHT.
Can I receive an income?
Yes in most cases the investments can be set up to pay you a regular income if required.
You may lose money if the value of the underling assets fall, targeted returns may not be achieved.
You may not be able to access your monies immediately if capital is required.
Tax rules may change in the future to restrict, or even remove, BPR from some or all assets.
Your investment must be held for 2 years to qualify for relief, it may take 2 or more months for monies to be fully invested in the underlying shares or assets. The 2 year clock will not start until monies are fully invested.
Can I transfer existing ISAs to an AIM ISA?
Yes you can, although this would need to be done via ISA to ISA transfer rather than encashment and reinvestment and will depend upon the investment house providing the AIM ISA. In many cases you would also be able to transfer out of the AIM ISA to a normal Stocks & Shares ISA should you wish, although in that case the BPR relief would be lost.
How is BPR claimed on death?
Your executors would need to complete the form IHT412 along with the IHT400 in order to obtain probate. A valuation at the date of death will be required to confirm the amount to enter on the form, the investment house would provide this. The HMRC will review the information provided and confirm whether the investment qualifies for BPR. Assuming this is confirmed the value of the investment will be excluded from IHT calculations.
Where can I get advice on BPR investment?
You should speak to an Independent Financial Adviser who specialises in estate planning. At Fiducia Wealth Management Limited we have a long history of advising clients on estate planning and would be happy to discuss your requirements with you.