People all over the country are leaving their loved ones with much bigger inheritance tax (IHT) bills than they need to. IHT receipts reached £5.4 billion in the 2018/19 tax year – their highest ever level.
With house prices increasing in recent years, it’s no longer just the wealthy who need to worry about IHT, so Downing have put together the below guide to help advisers and clients get to grips with business relief (BR).
Business relief – simple, speedy, flexible
BR is a tax exemption originally set up to allow families to pass their own businesses down through generations, without incurring crippling IHT bills. But now financial products allow individuals to invest in businesses that qualify for BR. This means the value of these investments will not be subject to IHT when the investor dies, if the shares have been held for a minimum of two years at the date of death. Learn more about IHT here.
Five benefits of business relief
- Speed: BR-qualifying investments are exempt from IHT after only two years (as long as shares are held at death).
- Access and control: BR services offer your clients monthly access to capital, with no penalties or charges on exit. Your clients can invest across three distinct sectors: asset-backed businesses, renewable energy and companies quoted on the alternative investment market (AIM).
- Income: BR investments can provide your clients with regular distributions or income.
- Simplicity: Trusts and gifts can be complex legal structures and may require medical underwriting. Compared to this, BR investments are relatively straightforward. Also, those who have set up a lasting power of attorney can make BR-qualifying investments without permission from the Court of Protection.
- Downside Protection Cover: Included as standard if you’re under the age of 90, this policy protects your initial net investment of a loss in value of up to 20% (conditions apply).
Intergenerational estate planning
Downing believes that financial planning on an intergenerational basis is increasingly important as it’s now not uncommon for four generations of the same family to be alive at the same time.
Today’s older generation are often considered the ‘lucky ones’, with many owning their own homes and benefitting from generous final salary pensions. Meanwhile, younger family members can be saddled with student debt, have less opportunity to get on the housing ladder, and face an uncertain economic future.
This means that, for many families, being able to pass their wealth on to the next generation is crucial – and that’s where BR investments can help.
It’s important to note that capital is at risk and returns aren’t guaranteed. tax treatment depends on the individual circumstances of each investor and may be subject to change. The availability of tax reliefs depends on investee companies maintaining their qualifying status.