Advisers have been warned against combining life assurance and business property relief to cover inheritance tax liabilities.
Business relief schemes can be used to avoid inheritance tax (IHT) that would otherwise be due on an amount invested in the scheme. The main benefit of this method is that all the money invested in a business relief scheme is currently free of IHT after two years.
Some tax planning arrangement advocate taking out life insurance to cover that two year period in case the investors dies before the estate is entitled to the business relief scheme tax exemption.
But Matt Johnson, strategic partnerships director at Octopus Investments, which specialises in tax-efficient investments, said HM Revenue & Customs would probably consider any arrangement that used life assurance to cover the intervening two years before business property relief kicks in as too artificial.
He said: "Our view on life assurance that wraps around the two years is that to us it looks a bit contrived, if you take an investment risk but there is assurance that covers you.
"Other companies do that but we feel it is a bit contrived for what we want to try and achieve.
"There is also the underwriting that goes on. If you have a client in poor health they may not get that life assurance and it may be very expensive.
"It is an effective way for HMRC to come in with the hit squad."
Figures published by HM Treasury earlier this month showed inheritance tax receipts will reach £6.2bn in 2022, despite chancellor Philip Hammond’s pledge not to introduce a “death tax”.
This is an increase of more than 30 per cent on inheritance tax receipts in 2016 to 2017.
Mr Johnson said business property relief had certain advantages over the use of trusts or gifting including the ability to keep control of the assets but he warned it was high risk.
