Three plants in stone pots
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Three tips if you’re new to inheritance tax investments

2. Adopt a goal-based risk approach

“There are a few areas that are consistently fed back on by the SimplyBiz file review team,” says Mark.

“Unsurprisingly risk is up there. 

“The tax benefits of BPR are compensating for some of the risk. But it’s not always clear in the client file that the client has an understanding of the risks. 

“There’s a bit of an obsession around the tax benefits – which are fantastic – but our file review team would be looking to see that the adviser has addressed attitude to risk, capacity for loss, and how that impacts the recommendation within the case.”

It’s worth recapping the risks here.

The value of a BPR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies maintaining their qualifying status.

The shares of unquoted companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

Approaching risk can be particularly challenging where a client has a relatively low appetite for risk overall, but is perhaps suitable for BPR. Yet advisers should not necessarily be deterred. 

“You’ve got two factors here. What proportion of a client’s assets are being recommended to go into a BPR investment? That’s a factor. Then there’s having a goal-based risk approach.

“A client can have different tranches of money at different ‘speeds’ from a risk perspective. And the file needs to clearly articulate that.

“The FCA picked up on this in their first assessing suitability report in 2016,” says Mark. “The FCA noticed there was a pattern in some cases where it wasn’t clear from the file whether the attitude to risk and the capacity for loss was for a particular tranche of money or for the client’s overall assets.

“If a client is a 6/10 for risk overall, and you have a solution that’s 9/10, if there’s no narrative around that then you’re looking at the case and saying that doesn’t seem to fit.”

3. Be thorough when documenting suitability 

“It needs that extra level of documentation,” concludes Mark. “Make it clear that for this particular tranche of money, for these reasons, a client is going to be taking more risk than the rest of their portfolio.”

“With BPR cases, you’ll want to have an accurate inheritance tax calculation on file too. And an ‘after inheritance tax’ calculation to demonstrate the impact of the advice.”