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More complicated IHT mitigation steps an adviser can take

This article is part of
Guide to Inheritance Tax Planning

In terms of additional options beyond the use of trusts and making use of allowances and simple exemptions, a key option that could be useful for business owners is business property relief.

The relief is potentially extremely valuable as it can reduce the value of an individual’s business interests by 100 per cent for inheritance tax purposes, thereby saving tax at 40 per cent of the value of those interests, according to Jason Ashman, financial planning manager at Henwood Court Financial Planning.

The word “business” is not specifically defined in the inheritance tax legislation. Instead, the concept of “relevant business property” is used to distinguish between what can qualify for BPR and what cannot.

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Relevant business property includes a share in a partnership, as well as shareholdings which are not quoted on the stock market. Assets held personally by an individual that are used by the partnership or company can qualify for relief at 50%.

Originally designed for entrepreneurs passing on family firms, BPR gives full relief from IHT on assets held for a minimum of two years.

Of possibly greater significance is the fact that investors can now claim BPR for portfolios of shares listed on the Alternative Investment Market, or investments in esoteric asset classes such as agricultural land and forestry, arranged for example through an Enterprise Investment Scheme.

The use of schemes involving BPR is at the riskier end of IHT mitigation techniques ad should only ever be considered once the more straightforward solutions have been exhausted.

However, BPR schemes can offer real value to clients as they effectively reduce the seven year qualifying period for potential exempt transfer to two years.

The trade-off is that BPR schemes are by their very nature high risk and come with higher charges. They are really for people who are happy with taking the risks associated with these investments and where the total exposure to these types of schemes represents a relatively small proportion of their overall wealth.

Keith Thomson, director of investment services at Blackadders, also suggests the following alternatives:

• Ensure pension benefits not in payment are directed to the suitable beneficiaries, thereby avoiding being included in the surviving spouse’s estate.

• Discounted Gift Trusts – obtaining an immediate discount of the gifted amount, removing it from the estate immediately, the balance falling out of the estate after seven years. Meantime, an income can be paid to the settlor for their lifetime.

• Gift and Loan Trusts – lend money to a trust and receive the repayments over the years, with any growth being out of their estate and still have access to the unrepaid capital.