Jessica Franks, business line manager for tax products at Octopus Investments, offers an insight into the opportunities waiting to be unlocked in an area which can be outside many advisers’ comfort zone.
Advisers who have Business Property Relief (BPR) in their arsenal are better equipped to make the most of estate planning.
That’s important to know, because estate planning looks set to be the single biggest advice opportunity of the coming decade. New research shows that three quarters of advisers surveyed find estate planning leads to them advising on client assets that they hadn’t advised on previously.
“When you start talking to clients about their inheritance tax problem, more often than not, they will begin to open up about all the other assets they own, whether it’s the second bank account or the holiday home in Spain,” says Jessamy Walker, a financial planner at Brown Dog Financial Planning in Berkshire.
But to make the most of this opportunity, advisers will need to deal with a growing client objection. Because when it comes to estate planning, clients are increasingly expressing concern about giving up access to their capital. In many cases, this concern makes them reluctant to do any estate planning at all.
This may explain why more than half of all advisers surveyed said say they now recommend BPR-qualifying investments, which stay in a client’s name and so can be sold later if need be.
How estate planning can bring more assets under advice
Estate planning can give an adviser greater visibility of a client’s assets, because they need to plan for the whole estate. In some cases, the adviser will identify assets that they weren’t able to take into account previously, and where there might be a better way to allocate them.
“Talking to clients about inheritance tax planning leads to conversations about their entire estate,” says Ken Bannister, an estate planning consultant at Active Wealth Independent Financial Advisers in Hampshire.
“We’ll often find that people have investment bonds and large ISA accounts, which we wouldn’t necessarily have touched before starting their estate planning.”
Estate planning never happens in isolation, either. Some clients may be planning to sell their home with a view to downsizing, or selling a business as they retire, both of which would free up previously illiquid wealth.
“Sometimes people sell a second property,” says Geordie Bulmer, an independent financial adviser, inheritance tax and pension specialist at AISA Retirement Planning in Bristol.
“They realise they’ve got to deal with the hassle of renting it out, and they also realise that the value of it is going to be taxed at 40% when they pass away, because their home uses up their nil-rate band. So some people think, let’s sell the house, take the cash and put that into an inheritance tax service.”
The estate planning opportunity in numbers
Thanks to rising house prices and stock markets, more people than ever are set to face an inheritance tax bill. The amount of inheritance tax paid to the Treasury is predicted to reach £6.9 billion by 2023-24. That’s an increase of £1.5 billion in just five years.
Then there is the fact that the UK has an ageing population. A woman aged 65 can now expect to live to 86 on average3. That has two profound implications. The first is that there are now more people than ever who are old enough for estate planning to be a concern. And their numbers are growing.
The second implication is that clients are more wary about running out of money during their lifetime. “Even if it’s quite clear from cash flow modelling that it’s not going to be needed, people often just don’t want to give away what’s usually a six-figure sum of money,” explains Buckingham Gate’s Peter Ditchburn.
“The thought that they’re not going to have it any more is often, to some people, quite an uncomfortable one.” It’s in this area that BPR can make a critical difference.
The role of business property relief
Nine out of ten advisers surveyed said say clients are increasingly reluctant to give up access to capital.
One way some advisers address this is to tell their clients about BPR, which can enable them to do inheritance tax planning while keeping assets in their own name.
Whether or not a client eventually uses BPR as a solution, discussing it as part of the estate planning conversation can help more clients feel confident about taking action.
“There’s often a control thing where clients are worried about whether they can afford to give their money away”, says Jessamy Walker at Brown Dog.
“That’s where BPR-qualifying investments come in; it tends to make the conversation a lot easier.”
There’s another advantage to discussing BPR-qualifying investment with clients for whom they’re suitable. It brings the conversation back to something clients are comfortable with.
“At the end of the day, it’s just an investment,” explains AISA Retirement Planning’s Bulmer. “Clients know me for investments, and most are comfortable with BPR once I’ve explained it.”
BPR-qualifying investments are considered high risk, so won’t be suitable for everyone (see below). For the right clients, though, it represents a piece of estate planning that feels like a natural extension of all the other investments you’ve advised on.
BPR-qualifying investments are not suitable for all clients
Before we go any further, it’s important to remind ourselves that BPR-qualifying investments won’t be suitable for every client. They put capital at risk, meaning the value of an investment and any income from it could go down as well as up. Investors could get back less than they invest.
Clients should also understand that the value of inheritance tax relief will depend on an investor’s personal tax situation, and on tax legislation which could change in future. Tax relief depends on portfolio companies maintaining their qualifying status.
Investors should also keep in mind that AIM-listed and unquoted shares can fall or rise in value more than shares listed on the main market of the London Stock Exchange. They can also be harder to sell.
This last point is particularly relevant for clients who are considering BPR as a way to retain access to their assets.
Since 2007, Octopus has provided more than £650 million of liquidity to investors in its flagship Octopus Inheritance Tax Service. We aim to provide liquidity as quickly as possible, with shares historically being sold within 10 days. However, given the nature of unquoted shares it could take significantly longer.
These figures reflect the fact that liquidity is at the heart of how we’ve built our inheritance tax products. However, liquidity can never be guaranteed, and it’s important clients understand that.
If you’ve never written BPR business before, or you’ve only done a small number of cases, it’s understandable if you have some queries about it.
Octopus is the largest BPR provider in the market4, having helped lower the inheritance tax bill on thousands of estates by using BPR. If you have any questions about how it works, the risks involved, suitability, or anything else, please give us a ring on 0800 316 2067 to speak to one of our experts.
Turning conversations into action
Octopus has published a new report called Unlocking Estate Planning: How Business Property Relief is opening doors for advisers.
If you want to read more about our research and its implications for your business, you can get a copy from us by calling 0800 316 2067.
We also have a lot of material that can help you kick-start an estate planning conversation with a client, and then turn that conversation into action.
The Untangling inheritance tax guide remains highly popular with both advisers and clients. It provides clients with a plain English overview of the major estate planning options (not just BPR). As such, it’s a useful guide to leave behind with clients and follow up on afterwards.
There’s also our What I Own and Where I Keep It document. Over a thousand advisers have requested a copy of this document since we launched it last year.
As the name suggests, its purpose is to build a complete record of what a client owns, so their estate planning can run like clockwork when the time comes. You can help your client fill it in to make sure there are no gaps, and it’s a natural opener for a chat about estate planning.
If you want to know more about any of this material, and the other ways in which we help advisers during the estate planning process, feel free to give us a call on 0800 316 2067.
1 Unlocking Estate Planning: How Business Property Relief is opening doors for advisers, published by Octopus Investments, February 2020
2 HM Treasury Budget, October 2019.
3 Social Security Benefits Planner, Life Expectancy https://www.ssa.gov/planners/lifeexpectancy.html
4 Tax Efficient Review, April 2019