Our previous piece on Estate Planning discussed how Business Relief allows clients to retain control of their wealth and leave a legacy for future generations.
We’re now looking at real-life examples of how advisers use Business Relief in their regular financial planning with clients. Remember, these examples are not financial advice, and Business Relief investments may not be suitable for all investors.
- Inheritance tax planning for clients in conjunction with the residence nil-rate band
Cassandra, 81 and divorced, has already taken steps to address her inheritance tax (IHT) liability. However, Cassandra’s financial adviser recently told her that the size of her estate means it does not qualify for the residence nil-rate band (RNRB). Despite this, she still has access to the nil-rate band (NRB) of £325,000. Cassandra is therefore keen to carry out further estate planning to lessen the IHT due on her estate, which she plans to leave to her children.
Cassandra’s estate is valued at £2.35m, which includes her home valued at £500,000. Due to the RNRB being tapered for estates worth over £2m, she cannot claim it. Her estate exceeds this threshold, causing the available RNRB relief of £175,000 to be tapered by £1 for every £2 over £2m, effectively nullifying its benefit.
Her estate includes £350,000 invested in Business Relief (BR) qualifying shares which she has held for over three years. Additionally, Cassandra made some monetary gifts to her children more than seven years ago.
Despite the BR-qualifying shares being exempt from IHT, they are still included in the calculation for the value of her estate which is important for the RNRB, leading to a potential IHT liability of £670,000 upon her death.
To address this significant tax liability, Cassandra’s financial adviser recommends that she settles the £350,000 of BR qualifying shares into a discretionary trust. By doing so, Cassandra is no longer considered the legal owner of these shares, as the trust assumes ownership.
The shares’ existing BR status ensures that this transfer does not deplete Cassandra’s NRB or generate a Chargeable Lifetime Transfer (CLT). As long as the trust retains the BR-qualifying shares, they will remain exempt from IHT even if Cassandra passes away within seven years.
By transferring these shares, Cassandra’s personal estate value would reduce to £2m, making it eligible to claim the full RNRB of £175,000. This relief can be applied to her main residence, which she intends to leave to her children.
If Cassandra goes ahead with her adviser’s recommendation, the IHT liability on her estate should be reduced from £670,000 to £600,000. This strategic estate planning not only decreases the IHT liability but also aligns with Cassandra’s wish to provide for her children while ensuring her financial legacy is preserved.
- Inheritance tax planning for clients with limited life expectancy
Martha, 85 and recently widowed, is keen to continue her IHT planning, though she wishes to avoid further gifting due to her age. Martha inherited her husband’s entire estate on his death, bringing her total estate value to £1.8m, which includes her home valued at £600,000 and a stocks and shares portfolio worth £400,000. Despite having a significant income from her pension to cover potential care costs, Martha is not sure she will live for a further seven years, a typical consideration for some estate planning strategies.
Martha’s financial adviser has explained that her estate will benefit from her NRB of £325,000 and her husband’s NRB, which was unused on his death. Additionally, since she plans to leave her main residence to her children, her estate qualifies for the RNRB of £175,000, along with her late husband’s RNRB. This combination provides Martha’s estate with total IHT allowances of £1m.
However, the remaining £800,000 of her estate will be subject to the 40% IHT rate, resulting in a potential IHT liability of £320,000 upon her death without further planning.
To address this challenge, Martha’s financial adviser recommends selling her stocks and shares portfolio and investing the £400,000 proceeds into a portfolio of BR qualifying investments.
The adviser explains that if Martha holds the BR-qualifying shares for at least two years and on her death, the shares will not be subject to IHT. Although a BR-qualifying portfolio carries higher investment risk compared to her current stocks and shares portfolio, Martha agrees it is within her risk tolerance and aligns with her estate planning goals. Furthermore, Martha understands that she can draw down an income from these investments, if necessary, subject to liquidity.
After holding the BR-qualifying shares for the required two years, the IHT liability on Martha’s estate would be reduced from £320,000 to £160,000, as the £400,000 in BR-qualifying investments would be exempt from IHT.
These scenarios illustrate how Business Relief can effectively address specific estate planning needs. However, Business Relief can cater to a range of issues for clients at various stages in their financial journeys.
It’s important to recognise that all investments carry an element of risk, and investing in Business Relief-qualifying companies is no exception. Tax treatment varies based on each client’s individual circumstances and may change. Additionally, tax relief relies on the invested companies maintaining their qualifying status. For clients looking to retain control over their financial future in later life, Business Relief offers a valuable estate planning tool without the anxiety of losing access to their wealth during their lifetime.
Diana French is retail strategy director at Triple Point
