Estate planning is all about leaving a legacy for future generations. And when it comes to this kind of planning, investments that qualify for Business Relief are an increasingly important part of the conversation.
Intergenerational wealth planning has been a hot topic for some years, and with good reason. Over the next 30 years, an estimated combined sum of family wealth in the region of £5.5trn will be handed to different generations, with most of that either through inheritance or gifting.
However, the other side of the coin is that inheritance tax (IHT) receipts are also increasing. Recently this year, HMRC reported that IHT receipts broke all previous records with receipts having reached £7.5bn from April 2023 to March 2024 – which is a £400m increase on the same period the year before.
See also: IHT receipts up again as HMRC stays on track for £9.5bn by 2030
With the IHT threshold frozen for over a decade and no immediate plans for review, the need for effective planning has become increasingly evident.
Traditionally, estate planning strategies have revolved around gifting assets to reduce the value of a client’s taxable estate or settling them into trusts.
Gifting
While HMRC gives everyone an annual gifting allowance of £3,000 every year, making gifts of larger amounts does run the risk of incurring an IHT bill. The seven-year rule on potentially exempt transfers means the gift only fully falls outside of the client’s taxable estate if the client lives for at least seven years after the gift is made. And if the client dies within the first three years of the gift being made, then depending on the size of the gift in relation to the client’s available nil-rate band, it could still be liable to the full 40% IHT charge.
More importantly though, once the gift has been made it’s no longer the client’s money. They’ve lost control over that portion of their wealth and may not be able to get it back.
Trusts
If your clients are uncomfortable with the idea of giving away large sums of money during their lifetime, a trust is a good way to plan for their estate – and for IHT – without losing control over those assets. But as with gifting, assets settled into a trust take seven years before becoming fully exempt from IHT. If the client died before the seven-year mark, those assets would again form part of their taxable estate.
See also: Understanding venture capital trusts
When it comes to estate planning, one size does not fit all. If you have clients who are not comfortable with gifting money away in their lifetime or settling assets into trust, it’s worth suggesting an investment solution that ensures they retain access and control over their wealth, such as Business Relief.
What is Business Relief?
Business Relief is a tax relief with quite a long history. When it was introduced by the UK government in 1976, the intention was to make it easier for family-owned businesses to be passed from one generation to the next, without triggering a large IHT bill that could potentially force the beneficiaries to sell the business.
Today, almost 50 years later, Business Relief is viewed as an important IHT relief available not only to family-owned businesses, but also to investors in Business Relief-qualifying companies.
How does Business Relief help with IHT?
Generally speaking, any ownership of a business, or share of a business, will be included in the valuation of a person’s estate for IHT purposes. However, thanks to Business Relief, estates can claim 100% IHT relief on the value of their shares in a qualifying company, provided the deceased owned the business or shares in the business on their death and for at least two years prior.
What type of companies are eligible for Business Relief?
To qualify for Business Relief, companies must satisfy a number of qualifying criteria including:
- The company must be a trading business (not created just for investment purposes)
- The company may have an interest in a qualifying business, such as a partnership
A company won’t qualify for Business Relief if:
- It deals in stocks and shares, land or buildings
- It is a not-for-profit organisation
- Is being sold or being wound up and will no longer carry on its business
How to invest in Business Relief-qualifying companies
One of the simplest ways for someone to take advantage of the IHT relief offered through Business Relief is to choose a dedicated investment manager to set up an investment portfolio on their behalf.
The investment manager will invest their money into companies it expects to be Business Relief-qualifying. Once the investment has been held for at least two years, providing they are still held when the investor dies, the shares can be passed to the investor’s beneficiaries without them facing an IHT bill on the amount invested.
Of course, all investments carry an element of risk, and investing in Business Relief-qualifying companies is no exception. It’s important to remember that tax treatment varies based on each client’s individual circumstances and may change. Additionally, tax relief relies on the companies invested in maintaining their qualifying status. With more clients keen to stay in control of their financial future in later life, Business Relief is an excellent way to carry out estate planning without them feeling anxious about losing access to their wealth during their lifetime.
Diana French is retail strategy director at Triple Point
