Business Property Relief (BPR) has been part of primary inheritance tax legislation since it was introduced in 1976, but over the past decade it has become an increasingly mainstream option. With the nil rate band stuck at £325,000 and house prices rising inexorably, more and more people are finding it can give them a way to reduce or eliminate the inheritance tax bill their families are going to face on their estate.
BPR is designed to ensure that family businesses can be passed down the generations without being sold or broken up to pay tax. Over the years there have been numerous changes to the finer points of the BPR regulations but the broad principle has always been that ‘relevant business property’ will receive full relief from inheritance tax (IHT).
Of course, there are some exceptions, such as businesses with large cash reserves, but the types of business property that may attract the relief include:
• A trading business, or an interest in one – a partnership, for example
• Unquoted shares in a trading business, even a minority holding
• Some shares in companies listed on the Alternative Investment Market (AIM)
BPR for the retail investor
Inits early days, BPR was used predominantly by people who had businesses of their own. But a new market has now emerged which is designed to give a broader range of retail investors access to BPR-qualifying products run by professional fund managers.
This type of service means that a wider range of investors can take advantage of the clear advantages that BPR optionshavewhen it comes to managing IHT liabilities. In the first place, it can give IHT exemption in just two years, rather than the seven years needed for most gifting and trust arrangements to become fully effective. This means BPR options may be worth considering when someone is not confident of living for another seven years – especially as life insurance options could well be too expensive in such circumstances, if they are available at all.
Just as attractive for many people, if not more so, is the fact that a BPR investment will allow them to retain full access to their capital, and control over it. This is a distinct advantage over traditional types of estate planning, where the settlor has to give away their property, either directly or into trust, and then does not have the option of taking it back if their circumstances change.
In contrast, someone investing in a BPR-qualifying product can have access to their money whenever they need it, for whatever reason. Some fund managers use this flexibility to give investors an option to take regular capital withdrawals, though equally the investment can be left to grow over time, if that is more suitable for the client.
A further advantage of a BPR-qualifying investment is that it will be simple to set up. There’s no need for a solicitor and no medical underwriting.
A flexible estate planning solution
Advisers will need to make sure their clients realise that BPR-qualifying investments will only be exempt from IHT if they still own them at the time of their death. However, there is some flexibility about taking moneyout ofa BPR-qualifying investment after the two-year qualifying period and moving it into another. HMRC has a generous replacement property rule which says that if someone sells an asset that qualifies for BPR, they can reinvest the proceeds of the sale in a new BPR investment within three years and qualify for the relief immediately.
This concession provides flexibility for all investors in BPR qualifying investments. Although it could be particularly valuable for business owners who decide to sell their company, or their stake in it, but are worried that they will lose the IHT exemption their ownership would have brought. They have three years to invest the money from the sale in a new BPR-qualifying business or product.
Just as important, if someone dies before they have had their BPR investment for two years, they can leave it to their husband or wife without interrupting the countdown to IHT-effectiveness – the surviving spouse doesn’t have to go back to scratch and wait another two years.
When discussing BPR investments with their clients, advisers should be clear that the relief is granted on a case-by-case basis. No business can badge itself as ‘BPR-qualifying’. HMRC will only decide if it is going to grant the relief after the shareholder has died. For this reason, it is essential to consult a BPR expert who knows from experience which businesses have a history of being granted IHT exemption.
Clients who may want to make withdrawals – perhaps to pay for long-term care – also need to bear in mind that they may not be able to sell their BPR investments as quickly as they would like to. Shares listed on AIM, for example, can take longer to sell than shares listed on the main stock exchange. Investors considering a BPR product should therefore look carefully at their fund manager’s record of facilitating withdrawals.
BPR and the IHT-exempt ISA
The fact that many AIM shares qualify for BPR has opened up an interesting option for thousands of investors since August 2013. This is when the ISA rules were changed, making it possible for AIM shares to be held in an ISA. As a result, ISAs can now offer inheritance tax exemption, as well as tax-free income and growth.
The AIM shares must be held directly in the ISA, rather than through a mutual fund. So, once again, investors are almost certainly better to seek professional advice on which stocks they should hold in their ISA. As long they are comfortable with the risks of investing in the shares of smaller companies, which can be more volatile and illiquid than blue-chips, they can now transfer all or some of their ISA portfolio into BPR-qualifying AIM shares, without surrendering the tax benefits of the ISA.
BPR in an estate planning strategy
Few investors will want to rely on a BPR solution in isolation. They are much more likely to see it as part of a joined-up estate planning strategy that might also incorporate trusts, gifts and an element of life insurance. Naturally, different options will be suitable for different assets.
A good example of this is using a BPR investment in tandem with a discounted gift trust. The trust will give immediate IHT exemption to the funds that HMRC decides are necessary to generate the required level of income. Alongside the trust, the investor can use a BPR product to build up exemption for the rest of their assets over the next two years.
Of course, when considering any BPR product, as with any investment, it is vital that the tax ‘tail’ – in this case, IHT exemption – is not allowed to ‘wag the investment dog’. Advisers will need to consider the suitability of any BPR investment for a particular client, taking full account of their detailed circumstances and their attitude to risk. However, the clear advantages BPR mean it could have a significant part to play in many investors’ estate planning.
This article is the view of Mark Williams, of Octopus Investments, which is authorised and regulated by the Financial Conduct Authority. As with all investments capital is at risk. Tax rules depend on the individual and could change.
