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Tony Wickenden: Do clients know enough about IHT reliefs?

Government research shows many people are missing out on the benefits of agricultural and business property relief

Inheritance tax change is an area on most advisers’ radar when it comes to the Budget. Ahead of the recent Autumn Budget, there had been some discussion in relation to inter-generational fairness, so it would not have been a total shock to have seen some change announced.

That said, the possibility was tempered by the size of the Government’s majority and the strong potential for IHT change to cause anger among backbenchers. The numbers, by the way , show revenue from IHT has hit £5.1bn (calculated May 2016 – May 2017).This increase is undoubtedly affected by the fact the nil rate band has not increased since 2009/10, meaning more estates are being brought into the IHT net.

As it happens, there were no IHT changes proposed in the Budget. But the Government did publish some research it had commissioned to understand the motivations, attitudes and decisions made by individuals on IHT matters, as well as the use of reliefs and exemptions in that process.

Specifically, the objectives were:

  1. To understand the decisions made by testators with agricultural or business assets when planning what to do with their estate
  2. The influence of IHT reliefs on these decisions
  3. What beneficiaries do, or intend to do, with inherited assets.

A total of 80 interviews were conducted among testators and beneficiaries who owned business assets, and agents who advise on business property relief and agricultural property relief.

The qualitative nature of the research means that findings are not statistically representative of the wider population. Nevertheless, it was interesting to see many individuals said they only knew a little about IHT. Very few were aware of BPR or APR.

Unsurprisingly, there was greater awareness of IHT and how BPR and APR worked among beneficiaries who had inherited and had to consider such issues, together with their advisers.

Given the taxpayers interviewed were owners of BPR or APR qualifying assets, it is unsurprising that most said obtaining the relief was not a main motivation when deciding whether to acquire more assets qualifying for it. The decision would be driven by the business need.

In relation to succession planning for those with BPR and APR qualifying assets, it was not the preservation or enhancement of relief that was the main motivator.

The research found the following:

  • Agricultural assets were commonly steeped in tradition and sentiment (more so than other assets), and this usually influenced how testators and beneficiaries treated them. Testators were usually unwilling to part with them during their lifetime, and focused on successfully passing all assets onto the next generation. Beneficiaries were likely to take on the agricultural business once inherited.
  • For most agricultural asset owners, the objective of keeping the estate together was crucial. Agents explained that, because of the intensive nature of farming, farming businesses often became unsustainable if broken up.
  • In relation to businesses, as well as ensuring the succession of wealth to provide financial security for their family, business asset owners (especially those with large businesses) also felt an obligation to keep the business running beyond their death to financially support their staff.
  • That said, those with business assets usually had a lower sense of tradition than those with agricultural assets. Subsequently, it was less common for an interested beneficiary to continue the business (compared to agricultural businesses). Agents described how, in these instances, it was common for individuals to wind up their business and sell the accompanying assets because it is what the beneficiary would have done with them anyway, post-inheritance. Agents mentioned some clients had purchased shares on Aim, or in EISs to reduce the IHT payable on their estate. However, many said this was a risky investment and so would not typically be advised.

Increasing numbers of individuals think the BPR-delivering benefits of qualifying tax-advantaged investments should form a part of overall estate planning strategy, especially for investors who wish to retain complete control over, and access to, assets used in estate planning.

It will be interesting to see what the Government intends to do with the findings of this research but, on the face of it, there was nothing that could be taken as potentially detrimental to estate planners and strategies.

BPR was also referenced in the consultation response to “Financing Growth in Innovative Firms”. In Para 3.24, an observation was made that some respondents had stated the BPR available for investing in low risk companies could be diverted to supporting investment  into innovative firms. The Government stated it will keep BPR under review but is committed to protecting the important role it plays in supporting family-owned businesses and growth investment in Aim and other markets.

In other news, the Government also announced a consultation would be published next year on how to make the taxation of trusts simpler, fairer and more transparent. A feeling of déjà vu all over again.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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