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IHT planning: Balancing BPR and investment risk

Using business property relief to mitigate IHT liability should not create unacceptable investment risks for older clients.


The nil-rate band has been frozen at £325,000 since 2009 and is set to remain at that threshold until at least 2018. The responsibility falls to advisers to ensure their clients are making full use of the legitimate allowances and reliefs that can reduce inheritance tax bills.

To qualify for business property relief investments must be made directly in the shares of individual companies, not through pooled funds. Direct investment in unquoted companies that qualify provides 100 per cent relief after two years if held at the point of death. This is shorter than the seven-year survival period required for gifted assets to become IHT-free, so could be an attractive solution for people who have inherited money, those who have left IHT planning to quite late in life or people in poor health.

Since August 2013, it has been possible to hold Aim shares in Isas and the new Isas (known as Nisas) now enable people to benefit from IHT relief in addition to the usual tax benefits. However, the problem is that unquoted companies that qualify for BPR are higher risk, so older clients that are likely to have a lower capacity for loss need to ensure that in dealing with potential IHT liability they are not also taking a gamble with unacceptable levels of investment risk.

St James’s Place divisional director, tax and technical support, Tony Mudd says: ”We do not offer a BPR qualifying Isa as we think it’s too risky. Broadly speaking, in a bull market, Aim rises quickly but also falls quickly when markets fall. It is volatile and there are liquidity risks. If someone has spent time building an Isa and is now of an age where they are concerned about IHT, with Aim they are effectively moving into an asset class that doesn’t suit their risk profile and is not as liquid as they would like it to be, just because they wish to mitigate IHT.”

Mudd explains it is possible to invest in BPR qualifying investments outside Aim in IHT services where the business is to lend money to other companies. This is a form of secured lending and lower risk than Aim. The portfolios are managed for capital preservation, in keeping with the needs of elderly clients.

Squire Patton Boggs associate and chartered tax adviser Helen McGhee says: “Aim may not suit everyone, particularly those who are more risk averse, due to the lack of certainty in relation to the return on investment. Diversification via a portfolio is a way to hedge that risk.”

Hargreave Hale director and fund manager Richard Hallet believes stock selection, with a focus on defensive Aim stocks of companies with long-term track records of “weathering periods of economic decline” can mitigate the investment risk to some degree.

For many people, the beauty of investing in BPR qualifying shares is the ability to retain control and access to their assets, unlike many trust arrangements where assets are given away or taken out of the client’s control.

“Aim and BPR qualifying investments are still in the client’s name, so if they need access to those assets they can have it,” says Stellar Asset Management chief executive Jonathan Gain. “Meanwhile, with a portfolio you are not putting all your eggs in one stock,” he says.

Stellar offers an insurance option to cover the risks of investing in Aim stocks. “Like any equity portfolio there are concerns about volatility. But investors are able to take on that volatility because the insurance policy says if, on the day you die, the value of your portfolio of Aim companies is less than what you put in, the insurance pays out,” says Gain.

Lucy Brennan, partner at accountancy firm Saffery Champness, points out that people who own a business often do not realise their company qualifies for BPR when they sell it, so they lose the potential to mitigate IHT. “That’s what I see the most. They need advice to make sure they are getting themselves into what they thought they were. When people are thinking about how to mitigate IHT they also need to consider what funds they are going to need in the future and what they want to do,” she says.

However, Octopus Investments business line manager for inheritance tax Mark Williams says tax mitigation cannot be the sole reason for someone to invest. He points out that the overall requirements of the family, not just the investor, need to be considered. For example, short-term volatility of Aim stocks could be addressed if the investor’s children intend to hold them for the long term.

“You also need to look at the specific investments. In the case of EISs, investment is in unquoted companies but the FCA doesn’t have the means to distinguish one from another so it categorises all of them as high risk. Advisers can look at how the investment manager mitigates the risk in that particular EIS,” he says.



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