The recent news that Inheritance Tax (IHT) receipts jumped by 14% in the 2021/22 financial year was of little surprise, given the IHT tax take has been steadily increasing for some years. The total amount of IHT raked in by the Treasury was £6.1bn in the last financial year, and the Office for Budget Responsibility predict the IHT bill will increase to over £8bn by 2026.
With property prices rising over recent years, coupled with long term increases in the value of other assets, more and more families are finding the estates of their loved ones are subject to IHT. The Nil Rate Band – the amount you can give away before IHT is charged – is frozen until at least 2026, and it is therefore unsurprising that the expected IHT receipts are set to rise.
For those where their estate is likely to exceed the IHT threshold, the good news is that sensible financial planning can help ease the potential tax liability. There are a number of methods to look to mitigate an IHT bill, and one tool available are assets that qualify for Business Property Relief (BPR).
Relief after two years
BPR was introduced in the 1976 Finance Act, and it was created to allow small businesses to be passed down through generations without facing a large IHT bill. The scope of the Act has widened so that it now allows investors of qualifying companies, as well as the business owners themselves, to obtain relief.
The tax relief is granted once an individual holds shares in a qualifying company for a minimum period of two years. The shares need to be held by the individual so that the qualifying assets remain held by them at date of death, and the shares must remain qualifying throughout the holding period.
The two year holding period is certainly more attractive than the requisite timescale needed for gifts made by an individual to escape IHT. Gifts in excess of annual exemptions are known as Potentially Exempt Transfers, and remain in an individual’s estate for a period of seven years.
A further advantage investments that qualify for BPR have over the gifting route is that funds are retained by the individual. If access to the capital is required, then the shares can be sold to raise the necessary funds. Of course, the value of the shares sold will return to the potential estate for the purposes of the IHT calculation.
BPR and AIM shares
To qualify for BPR, shares need to be purchased in unquoted companies, or selected shares listed on the Alternative Investment Market (AIM), which is a UK market primarily used by smaller companies. A wide range of investment managers have produced Discretionary Managed portfolios of shares that they believe will qualify for BPR, either through investments in unquoted companies, or through qualifying shares that are listed on the AIM market.
Where investment managers use unquoted companies, they will often adopt an investment approach whereby funds are allocated in businesses that engage in trades such as renewable energy, property or business lending. These types of strategy often look to generate modest returns over time. Shares in AIM are likely to be more volatile, due to the often unpredictable nature of smaller companies, where business fortunes can often change rapidly.
Whichever approach is adopted, it is important to acknowledge that buying shares in smaller or unquoted companies, is likely to carry additional risks than investing in larger and more well-established companies. In particular, the shares of unquoted companies may be harder to sell.
Political interference
Whilst IHT tax legislation has been stagnant for some time, a risk of any longer term planning is that the tax rules are changed after plans have been put in place. This could potentially have the effect of undoing prudent measures to restrict or eliminate the tax bill.
IHT is an easy tax to collect, as the personal representatives of an estate that is liable to IHT cannot obtain the grant of probate to deal with the estate until the IHT has been paid. Furthermore, beneficiaries of estates that are liable to IHT may be perceived by some quarters as receiving a large inheritance, and potentially makes IHT a soft target when it comes to raising revenue.
Both Tory leadership candidates have mooted that they would review the current IHT regime if they were elected as Prime Minister, and opposition parties have also laid out plans in previous manifestos to reform the way that estates are taxed. Reform of the IHT rules is likely in the longer term, and it is therefore important that plans can adapt to potential changes.
Get the right advice
Given that IHT planning is carried out with longer term objectives in mind, it is important to obtain appropriate advice from experienced financial planners. Investments that qualify for BPR are complex and given the wide choice of options available, it is important that providers and products are selected carefully. At FAS, we are adept at providing clients with comprehensive IHT planning advice as part of our holistic advice service.
If you would like to discuss how to reduce the impact of IHT on your estate with one of our experienced advisers, please get in touch here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.
