Inheritance tax is often branded Britain’s most despised tax but there are ways it can be mitigated, said Time Investments strategic partnerships manager Harry Donoghue.
At yesterday's (May 20) Paraplanner Conference, run by the Chartered Institute for Securities & Investment, Donoghue outlined different planning approaches when advising on inheritance tax and how business relief can tie in with that.
Donoghue said inheritance tax came out as the most hated tax for a few reasons with one being that it is overly complicated.
“There is onerous paperwork for a lot of those who don't even need to be paying inheritance tax," he said.
Secondly, it was perceived as unfair because “the larger estates actually pay less IHT as a portion of their wealth", which he said was mainly down to clever tax planning.
Donoghue stated that business relief can help with inheritance tax.
Business property relief was introduced in 1976 at 30 per cent to help facilitate the transfers of small family businesses from one generation to the next, and minimise the inheritance tax burden.
By 1987 it was raised to 50 per cent and by 1992 to 100 per cent. In 1998, it was extended even further with 100 per cent relief being extended to minority shareholders who didn't have to be business owners in its entirety. In 2013, it expanded further with AIM shares eligible to be held in an Isa.
Donoghue said: “There's a number of reasons business relief is popular but the biggest reason is probably the access and control it gives you. Some of the types of plans that you get involved in terms of trusts, gifting money out, servicing income or just lifetime gifts, you are losing access and control of that money, so it's fine if you've done appropriate cash flow modelling and you're certain that the client has not access the funds, but some clients are perhaps nervous about giving full control, giving that money outside of the estate.
“What if they need that later care or other expenses. With business relief, it's an investment in their own name. They could choose to sell down that investment later on in their life, subject to liquidity, and they can regain access to that capital.
"It's also pretty quick. If you think of some of the traditional tax planning methods that were mentioned, gifting, putting money into trust, you do have that seven year clock to be aware of but with business relief, it's just a two year clock for the outside of your estate for inheritance.
“It's nice and simple, clients understand it and there are no complex structures behind it, it's simply an investment in their own name.”
Essentially, business relief reduces the value of a business or its assets when working out how much inheritance tax to pay and owners can get relief on either 50 per cent or 100 percent while still alive or as part of a will.