If the client was in poor health, an adviser would likely urge caution against traditional forms of estate planning, such as gifts and trusts, which take seven years or more before becoming free from IHT. However, there is a three-year window during which time the proceeds of a business sale can be invested back into BPR-qualifying assets. Known as ‘replacement relief’, if the client invests some of the sale proceeds in a BPR-qualifying investment, they won’t have to wait two years – their investment will immediately be exempt from IHT.
BPR incentives
There are other benefits to consider. Whereas settling assets into trust or gifting permanently remove assets from the client’s ownership, shares in BPR-qualifying investments continue to be held in the client’s name. Subject to liquidity, investors can ask to sell shares and have the proceeds returned to them, or they can set up regular withdrawals to meet changing needs, such as care home fees. Also, BPR-qualifying investments do not use the nil-rate band. Investors can plan for their estate to use their £325,000 allowance to reduce the IHT charge on less liquid assets, such as their home, which are otherwise difficult to remove from the estate when planning for IHT.
This same approach could be applied for business-owning clients with other concerns. Take the example of a younger serial entrepreneur, who has sold a business and would like to take time out before reinvesting the proceeds into another business venture – the client could invest some or all of the sale proceeds in BPR-qualifying investments before deciding on their next course of action. This would make sure the estate was not exposed to an IHT bill in the intervening period, as well as providing the opportunity for the client’s next business to instantly qualify for BPR without resetting the two-year clock.
Settling assets into trust
If a client expects to realise a large lump sum on the disposal of their business, one of their first thoughts might be to make early provision for future generations. A discretionary trust can present an attractive opportunity to retain some control while starting to plan for IHT. As the client’s investment should qualify for replacement relief, they could decide to settle the new BPR-qualifying investment into trust (without needing to wait for two years first) and should not be required to pay the chargeable lifetime transfer charge of 20 per cent that would otherwise be due.
