The government introduced new rules to help better manage inheritance tax but how effective are these in limiting the final bill? Simon Housden investigates.
The 2015/16 tax year was a bumper one for the taxman thanks to record inheritance tax (IHT) revenues amounting to £4.7bn. And there is no sign of any slowdown in the death tax take with the Office for Budget Responsibility forecasting IHT income to reach £6.2bn in the next five years.
It is no wonder then that inheritance tax planning is a serious priority for individuals keen to protect their estates from the 40 per cent tariff imposed by HMRC. With pensions largely immune from IHT, attention has turned to other means of limiting the tax burden.
For more than four decades, advisers have used Business Property Relief (BPR) as a straightforward route to IHT planning, but this tried and tested strategy has seen a rise in interest in the past year [see below for definition].
Leading research company, Intelligent Partnership, have now published this year’s Alternative Investment Report into the Business Property Relief market and this year reported 98% growth in the amount of BPR assets set against estates, with investors drawn by the IHT planning opportunities.
This investor interest is also reflected in the burgeoning market which saw a 75 per cent increase in BPR products listed on the Alternative Investment Market (AIM). Since BPR shares held for more than two years qualify for IHT relief, it allows investors a quicker route to limiting their tax burden.
Rather than giving away huge sums over which they lose control, investments in BPR qualifying shares allow them to retain access, flexibility and the potential to benefit from investment growth.
Further more, they are not subject to the same lengthy seven-year wait which applies to long established estate planning strategies, such as gifting.
Additionally, since 2013, BPR qualifying shares can be held within an Individual Savings Account (Isa) allowing the investor to not only benefit from the ISA’s unique treatment but from IHT relief as well.
The growth of the BPR market has created something of a virtuous circle. According to the BPR report - the quality of investment opportunities is improving, diversification is increasing and investments are becoming more transparent.
These improvements are important for the BPR market since unquoted shares are considered a higher risk investment than their listed counterparts and may be subject to greater volatility.
It is no surprise then that given the moves in the BPR market, a survey of advisers undertaken by Intelligent Partnership found more than two-thirds (68 per cent) anticipate an increase in BPR investment; 8% higher than was recorded in last year’s survey.
A large proportion of last year’s IHT increases came from properties surpassing the £325,000 nil rate band (NRB).
The Exchequer has stubbornly maintained the NRB since 2009 in spite of property price inflation, meaning many more residences now qualify for IHT. In fact, the number of estates liable for IHT has been rising every year since 2011/12.