Advertorial: Death and taxes

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.

Real relief

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.

Banding together

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. 

The most notable increase is observed in the £500,000 to £1m band, where the number of estates subject to IHT has increased from just over 7,500 in 2011/12 to around 9,000 by 2013/14.

To alleviate the pressure on middle income earners who – thanks to house price inflation – now find their properties are subject to IHT, the government announced the introduction of the Residence Nil Rate Band (RNRB).

Any deaths after 6 April 2017 will now be entitled to claim a RNRB of £100,000 in addition to the current NRB of £325,000, subject to various rules outlined below.

HMRC plans to increase the RNRB by £25,000 a year until 2020 after which point it will rise in line with the CPI measure of inflation (see table one).

Prior to this year, a £900,000 estate would have been subject to an IHT liability of £100,000. This year it fell to £20,000. Fast-forward to next year and, thanks to RNRB, the liability falls to zero.

The rules

However, the RNRB is not without stipulations. First and most importantly, the individual must own a home, or a share of one, which is included in the estate.

Next, the residence must be passed to a direct descendent - in other words children, step children or grandchildren.

Married couples leaving their assets to each other may transfer the RNRB to the surviving spouse allowing them to use up to twice the tax free amounts available to a single individual.

Unmarried couples and those in a civil partnership, or who have divorced are entitled to the RNRB individually but may not transfer unused RNRB to each other.

The value of the estate must not exceed more than £2m to qualify for the full RNRB. Once the estate passes this point, the RNRB will reduce by £1 for every £2 past £2m. The valuation is based on an individual’s estate immediately before death and includes all assets less their liabilities. The valuation is performed before applying any exemptions or reliefs.

The rules also make allowances for those who downsized their home before death but the RNRB is applicable only if the initial property would have been part of the deceased estate before it was sold.

There are further rules surrounding the RNRB and it is worth visiting www.IHTcalculator.com to assist with calculating your client’s potential IHT liability as this takes into account both the taper threshold and the number of nil rate bands available. 

Planning in action

The importance of the RNRB to IHT planning is manifold. 

If the first deceased estate amounts to more than £2m, advisers should consider reducing the estate to take advantage of the full £100k allowance.

While it is possible to gift away the taxable estate this must be done more than seven years before death in order to gain the full benefit. It is also possible to set up a trust but this can be expensive and complicated.

Instead there are other quicker and simpler IHT planning opportunities to take advantage of the full RNRB.

By investing the amount which is liable to IHT into BPR qualifying shares just two years before death, those shares can pass directly to the beneficiaries without being included in the estate. This allows the investor to retain control of their money and to boost the value of their investments if the shares perform well. 

This flexibility can be brought into play when a property increases in value by correspondingly increasing the investment in BPR shares. If the reverse is true and the property falls in value, then the investor can reduce their shareholdings.

It is also worth considering what will happen to the surviving spouse’s estate when the first partner dies. If they leave their full estate to their spouse and this pushes them over the threshold even when the transferred RNRB has been taken into account, it may be worth passing BPR qualifying investments to children or a trust.

Summary

The advent of the RNRB combined with additional IHT planning opportunities mean inheritance tax does not need to be a one-way street in favour of HMRC.

The current environment creates a positive opportunity for advisers to work with a number of other professionals including will writers and solicitors to find the most efficient ways to best manage IHT liabilities.

Taking early steps is important. IHT tax planning can take time; even with the relatively speedy use of BPR, investors still need two years to qualify. And it is also important to remember the rules change. Implementing a variety of IHT planning strategies can help mitigate the impact of a change in direction by HMRC.

While nothing in this world is certain except death and taxes, there is still a chance to help manage how much people pay. The use of RNRB and BPR, in particular, offers a promising strategy.

What is Business Property Relief?

Business Property Relief is an established and relatively simple part of IHT planning. Once an investor has held BPR shares for more than two years, these qualify for IHT relief.

To qualify for BPR the share must meet the following criteria:

•    Not be publically listed on any stock exchange

•    Be in a company that trades rather than invests

Shares qualifying for BPR can be listed on the Alternative Investments Market and may also be held within an Isa.

Source: HMRC, https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

About TIME

TIME Investments is an award winning investment manager specialising in tax efficient investment solutions and long income property funds. Our original IHT service holds a 21 year track record of successfully achieving IHT savings for our investors, with over 3,000 investors to date, of which over 1,000 have successfully achieved BPR and exited. Combined we have over £600 million in assets under management and, with a nationwide business development team of 23, we are dedicated to supporting the adviser market.

If you would like to find out more about TIME Investments or set up a meeting with your local contact, please contact us on 020 7391 4747 or questions@time-investments.com.