When considering IHT and estate planning there are numerous tools which financial advisers and individuals can use to maximise what is left to clients’ beneficiaries.
My particular interest in this area is Business Relief. Business Relief investments can be exempt from IHT after being held for just two years. This is usually the main driver for investors and advisers, but further consideration should be given when considering the devil in the detail.
The aim of most Business Relief propositions is of capital preservation. This is correct and the last thing an adviser wishes to do in this scenario is lose clients’ money and further erode the estate being passed on.
However, there are opportunities which provide significant income opportunities while focusing on capital preservation. Income of up to 6 per cent can be obtained from such propositions, thereby enabling investors to benefit from their investment while reducing the tax liability for their estate beneficiaries.
If you don’t understand the income model, then how can it be predictable?Compared to most trusts, Business Relief propositions are generally very simple to understand and, in my opinion, the simpler the better.
Such propositions allow the investor to retain control over their money and some propositions allow withdrawals at regular intervals or with a limited notice period (such as 28 days’ notice).
The investment is simply that, an investment whereby the investor becomes a direct shareholder in the underlying unquoted investee company(ies) and thereby qualifies for Business Relief.
Things I believe we should to consider when reviewing Business Relief propositions:
■ Trade
Is the underlying company carrying out a ‘trade’? Generally, in order to qualify for Business Relief a company must be trading and can’t simply hold property or cash.
■ Asset backed
Is the investment in a tangible asset that will offer a greater degree of capital preservation (i.e. is there something physical that can be sold for?) Would the ‘asset’ produce a reasonable value if all else fails it has to be sold to return funds?
■ Predictable income
If seeking income, is the income model predictable? Does the underlying company work with respected counter parties, is there any government subsidy involved in the income model, is the income model easy to understand? If you don’t understand the income model, then how can it be predictable?
■ Access
Is the client or beneficiaries requiring access to the capital, how quick and easy is it to withdraw partially or fully? Are you reliant on an illiquid junior stock market to generate exist, and how reliant is this?
■ Long term
Is the investment viable in the long-term? If the investor remained invested for fifteen to twenty years, would the investment continue to deliver the predicted returns and still be a valuable asset?
■ Understand the investment
If the investor’s money is going in to a ‘black-box’ of investments, how can the investors be sure that it is something they actually wish to be invested in? How can they understand the business and revenue model? How can they be sure it fits their moral and ethical outlook?
I believe that investors should always know exactly where their money is going and what it is being used for.
Without this knowledge there will always be unanswered questions which can perhaps bring nasty surprises.
Business Relief propositions can be a very useful estate planning tool but don’t invest simply because it ticks the IHT box, invest because the investor understands and wants the underlying investment as well as it being a useful IHT tool.
Ian Warwick is managing partner at Deepbridge Capital LLP
