Investor appetite for business opportunities offering inheritance tax mitigation is increasing, as is the number of providers bringing out offers. As the IHT benefit only comes into play on death, this area contains forms of risk that most investors will not have had to factor in before – the risk that the product may not meet the Business Property Relief rules on death and the risk that any future changes in the law may have an adverse effect upon the tax benefits.
To qualify for BPR, at death the business interest should be either a holding of unquoted shares or the whole business or an interest in a business.
The definition of a “business” is wide and is not as restrictive as the accepted definition of a “trade” (ICTA 1988 section 832) and as a result we see IHT offerings based upon renewable energy and Private Finance Initiative financing opportunities which would not qualify as a “trade” in an EIS or VCT. The aim of a provider is to find a BPR business opportunity that meets all the investor requirements listed below and is also scalable.
As an ideal, we think that advisers and potential investors are seeking a business opportunity involving potential IHT mitigation product that offers:
Downside protection – Whilst a business opportunity for the investor, most are seeking to have some form of downside protection.
Upside potential – To earn a slight annual return means that the investment must have some upside potential. However this will usually be small.
A non-contentious business model – The business should not be one that HMRC will take issue with.
Low charges – Ideally charges should be low.
Good liquidity – This is a basic requirement of an IHT product but can be difficult to achieve.
The extent to which the current products can fulfill these wishes is untested. As most of the products are relatively new, the incidence of investors dying are few and therefore HMRC’s response to allowing BPR relief to the various business opportunities embedded in the products is unknown.
Also unknown is the robustness of the risk mitigation strategies employed by each offering as they have not in general developed a track record.
Returns to date in some offers have been below the targeted levels. Potential investors need to look at returns levels mentioned in the documentation with the following in mind:
- Not all the amount invested will find its way into return producing opportunities. There will be initial fees and in some cases companies retain a cash buffer to help with liquidity.
- The gross yield on the asset translates into a lower return earned by the investor vehicle as various fees and charges (including corporation tax and commission trail) are deducted.
Martin Churchill is editor of the Tax Efficient Review