For most people in the UK, IHT is not given great consideration principally because of the belief that it only affects the rich. However, rising property values mean that many issues being faced by families today are a direct result of being dragged into the IHT net by stealth means.
IHT is levied on those estates in excess of £325,000 at 40 per cent. This rate is set until April 5, 2015. IHT is capable of being avoided with sensible financial planning.
There a number of established ways to mitigate IHT and these include making a will, gifting, insurance, equity release, insurance and trust planning. The latter is now very much under the Government’s microscope as all new plans need to be disclosed under the Dotas regime.
One of the major problems with all of the above is that the donor is required to give up control over some or, in most cases, all of their estate. Assets are transferred to someone else which may not always be desirable.
Another issue is that gifts and trusts also take seven years to be fully exempt from IHT. This then requires careful financial planning which sadly is not always on the mind of the donor.
All is not lost as there is way of mitigating IHT without the need to relinquish control and enables estates to be free of IHT within two years. Unfortunately, our research shows that this simple area of financial planning is not widely known.
This mitigation strategy is available through business property relief or BPR.
BPR enables you to claim relief on any business assets that you own and includes shares in qualifying busin-esses. The types of company which qualify for BPR must be unquoted although this definition includes Aim and Plus markets companies and they must also actively trade, that is, they cannot be an investment company.
There a number of established options of utilising businesses which qualify for BPR. The two most common are Aim portfolios and Forestry.
However, there are other opportunities which can be considered and these include:
- property development
- owning and managing public houses
- debt factoring
Most of these trades do offer a lower-risk profile as they are asset backed which, provided you do not borrow against these assets, do offer security over the long term.
Your clients can facilitate investment into a range of BPRqualifying trades providing investors complete control and the ability to choose which projects they wish to participate in.
There are plans that are available pre-packaged for your clients to invest in, for example, Close trading companies and Stellar trading companies. The benefit of these packaged plans being that clients have the freedom to choose the elements that they wish and advisers do not need to manage the administration and accounting functions of these companies for clients.
To illustrate how these trading companies work we will use Stellar trading companies as an example. (This is a concept that the directors of Stellar pioneered in 1996.)
Each investor interested in sheltering their assets from IHT can set up their own limited company and became a sole shareholder in that company, enabling the amount invested to be IHT-free after two years.
This company has the opportunity to participate in range of qualifying trades such as:
- Aim investment portfolios
- property development.
A partnership would be formed with other like-minded investors with similar companies to undertake a particular project and capital would initially be spread across five different partnerships this is illustrated in figure one (see below).
In this example, each individual project would be appraised by Stellar and only those that meet the relevant investing criteria would be put forward to trading company owners. This project appraisal, which includes full due diligence on the operator, developer and location, would be accompanied with a full financial budget.
The shareholder of each trading company is then asked whether they wish to participate in these projects and is free to say no. At the end of each project, capital will be recycled using the same process and any profits can be distributed as income to shareholders if they wish.
As with all BPR activities, investors need to continue trading until death but they have full control over their company and are free to bequeath its assets under their will to whomsoever they wish. However, if circumstances change, holdings can be disposed of and capital can be returned, flexibility that other IHT planning options cannot provide.
John Piper of Piper Taylor Palmer, a financial adviser based in Oxfordshire, has used the trading companies’ concept with clients.
He says: “I like the fact that no projects require borrowing of any kind and that my clients’ capital is spread across a range of projects. This is a low-risk method of sheltering IHT, with an opportunity to make at least 5 per cent per annum from these projects. My client chooses the projects proposed by Stellar and loves the fact that they remain in control of their capital and that the structure offers the flexibility that if circumstances change, it is relatively straightforward to access capital.”