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Business Property Relief (aka Business Relief)

Business Property Relief (BPR) has allowed small businesses to be passed through the generations without incurring an Inheritance Tax (IHT) liability.

Features

  • Exempt from IHT after 2y
  • Optional income taxed as capital
  • Retain full access to assets
  • Can utilise existing ISAs
Limitations

  • Risk discussion required
  • Underlying investments selected by investment manager
Business Property Relief invests in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

Investment for individuals looking to reduce a potentially large IHT liability…

Since 1976 Business Property Relief (BPR) has allowed small businesses to be passed through the generations without incurring an Inheritance Tax (IHT) liability.

The scope of BPR has evolved over the years to become a method of investing for individuals looking to reduce a potentially large IHT liability at the time of their death.

Business Property Relief Qualifying Investments
Alternative Investment Market (AIM), Business Property Relief Schemes and EIS invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

Traffic light comparison

AccessSpeedSimpleControlCost
Gifting
Whole of Life
Loan Trust
Discounted Gift Trust
Flexible Reversionary Trust
Business Property Relief
How each of the solutions fare in relation to these issues is indicated above using a traffic light system; green being the most favourable.

Please note: this graphic is subjective to change, not every expert will agree on the distribution of colours. There is much more to know before you act and that you should always seek financial advice first.

The features of a BPR solution that are very useful are…

  1. The money is accessible.
  2. It is effective for IHT purposes after just 2 years.
    1. There is also a solution that incorporates a 2y term assurance suitable for a day 1 solution.
  3. The income that is provided is technically a capital gain.
    1. It is common for returns and ‘income’ from BPR schemes to be structured as capital gains, which can provide be an effective way to reduce or avoid tax on payments from the scheme by using your Capital Gains Tax exemption.
ISAs for BPR
It is not just the designated IHT schemes that qualify for BPR. Any small business shares could qualify, so long as the business is trading and not listed. This includes EIS investments and investments in the AIM market.

This allows an investor to introduce more diversity if they are utilising this exemption for IHT by spreading their net a little wider. This is generally a good practice as diversification is king.

As of April 2013 you have been able to invest your ISA in to AIM shares, which after 2y can effectively make your ISA IHT efficient, without having to give up the other tax benefits of holding large amounts of capital in ISAs.

Business Property Relief Schemes invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

Business Property Relief qualifying investments for IHT Planning (in practice)…

Access to funds is one of the most undervalued tools in IHT planning.

IHT planning starts with ‘how much do you need for your lifetime.’ This is a very difficult question to answer and with maximum respect a question that you will probably answer wrongly.

Should you live longer than expected or need more than is expected, you want to know that there are funds that can be utilised. Like with Flexible Reversionary Trusts, a BPR qualifying investment is one of very few tools that fit the bill.

However, we would say to use other money that doesn’t qualify for exemption first.

In practice, these types of investment are high risk, and are not appropriate for everybody. Even experienced investors who understand the risks should not allocate large amounts of their capital to these kinds of investments.

We would generally look for other solutions if you have enough likely time available, but may combine solutions if you also have a very high taxable income and are not utilising your capital gains annual allowance.

If you are short on time, this is definitely going to be a very useful investment type to mitigate IHT.

TAKE CARE – The tax treatment of these schemes cannot be guaranteed. In order to benefit for relief and IHT benefits these schemes have to continue to meet rules set by the HMRC. HMRC assess every claim for IHT relief based on investing in a BPR scheme individually to see if the investment qualifies.

Schemes that promote these schemes have usually consulted with HMRC first, so with care, undesirable outcomes can be minimised: we feel this highlights the value of advice.

IHT Planning is best dealt with holistically, taking into account all of your finances and goals

We have many years of experience in advising clients across the country who wish to use legal processes to protect their estate, and we provide a tailored service for each individual. Our company is well qualified to answer questions and enable you to organise your assets.

If you have any questions or queries call us on: 0800 093 4115

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