Tony Mudd: Are supercharged business relief schemes worth it?

Advisers must tread carefully with arrangements that integrate life assurance and business relief

Any adviser operating in the estate planning market will be aware of gifts that are immediately exempt from inheritance tax. That is, outside the donor’s estate from the date of gift. However, what is required is just that – a gift.

Advisers will be equally aware of the value of business relief: investments in qualifying shares, including those on the Alternative Investment Market, that are broadly exempt once held for two years.

Of course, where funds have come from previously qualifying assets – say, the sale of a business – they may be immediately exempt, having already surpassed the two-year qualifying period. However, where new monies are invested in business relief qualifying shares, funds will not be exempt until they have been held for two years.

What exactly qualifies for business property relief?

Perhaps in recognition of this, there are now a plethora of “supercharged” business relief arrangements with integrated life cover that will pay out a sum equal to 40 per cent of the initial investment.

In this way, should the investor fail to survive two years, the sum assured will pay out a sum equal to the IHT that will become payable. In simple terms, these supercharged business relief investments are effectively exempt from day one.

This can be an ideal solution – and the value of simplicity should not be underestimated.

However, an adviser should not overvalue simplicity either and while these can represent excellent estate planning vehicles, they are not a panacea solution.

Clearly, the life assurance integrated within the business relief arrangement needs to be paid for.

The cost varies with provider but is broadly taken by an increase in the annual management charge.

So before looking at this area, advisers should first assess the true value – specifically, the need for life assurance. There are two important considerations here:

  • While the average age of business relief investors varies, according to information provided by promoters of schemes, between late 70s and early 80s, life expectancy will comfortably exceed two years for these ages. The increased AMC will, in many cases, wipe out the first two-year returns;
  • If the investor is married or in a civil partnership and the business relief asset is to be gifted to the spouse or civil partner, then only one of them has to survive for the two-year period. So does the need for cover exist?

We then need to look at the value from a different perspective. Does the cost of the cover, represented by increased AMCs, deliver value for money when considering viable alternatives? In other words, could the life cover be purchased separately from the business relief provider?

Tony Wickenden: Is IHT in line for a shake up?

In reality, this is not a nice-to-have. Under Mifid II rules, when an adviser recommends “bundled” products, which this clearly is, they are required to tell the client whether it is possible to buy different components separately and must provide information on the costs and charges of each component.

There are providers that offer two-year term policies and some, unsurprisingly, are designed specifically to run alongside the business relief investments. Where a potential investor has a spouse or civil partner, a second death two-year term assurance policy will invariably be cheaper than the provider’s increased AMC costs.

Whether premiums are competitive against AMCs where there is not a spouse or civil partner will depend on the age and health of the investor. Irrespective of this, though, consideration needs to be part of the advice process.

Tony Mudd: The critical reviews being missed by advisers

I have heard it argued that integrating life assurance with business relief is not something HM Revenue & Customs will like and is another potential nail in its coffin.

This is not an argument I have ever bought, on the basis that HMRC gets its money if the client dies within two years either way.

What is clear to me, however, is that while there is absolutely a place for integrated business relief – which for the right client offers a simple, good-value solution – it is imperative advisers offer viable alternatives or discount them as part of the advice process.

Tony Müdd is the divisional director for development and technical consultancy at St James’s Place

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