Jessica Franks, Head of Tax at Octopus Investments, explains how one estate planning option can help your clients plan their estate.
Advisers who have Business Property Relief (BPR) in their arsenal are better equipped to help clients plan for their estate.
If a client has an objection to planning for inheritance tax, often that will be either a reluctance to give up wealth in their lifetime, or a concern about surviving seven years.
It’s common for people to think about their estate later in life. But when a client is elderly or in poor health, it’s less likely a lifetime gift will work as intended, because they need to survive the seven-year taper. That can lead some clients to believe they’ve left it too late to plan their estate.
This is a legitimate concern. The most recent data available shows £197 million was raised from failed lifetime gifts in the 2017/18 tax year alone1.
The simple answer would be to put planning in place sooner. But the younger a client is, the more likely that client will be concerned about access and control of their wealth.
Making lifetime gifts puts capital permanently out of reach. So even when a client is shown, with the help of cash flow modelling, that they can comfortably afford to make gifts from their estate, it’s natural for clients to feel uncertain. How long will I live? What if my needs change? Will my costs increase, perhaps to pay for care fees?
And a client’s concerns about how much money they’ll need in the future are amplified the earlier estate planning discussions take place, because they have longer to live. It can also be an unappealing prospect to commit to giving away wealth while still relatively young.
So how can advisers overcome these objections?
Business Property Relief
One option is Business Property Relief (BPR).
BPR is a longstanding inheritance tax relief that can be a useful option as part of a client’s estate planning. Once a client has held a BPR-qualifying investment for two years, it becomes zero-rated for inheritance tax. The client can then continue to hold the investment until death, at which time it can be passed on free from inheritance tax.
Investments that qualify for BPR can achieve faster relief from inheritance tax relief, and they allow an investor to keep wealth in their own name. So BPR offers two clear advantages over gifting. The first is that it takes two years to become exempt from inheritance tax, compared to seven years with gifting. The second is that because the planning involves an investment, if the client should need capital later on, they can sell their investment.
Clients often become a lot more engaged in the planning process once they understand that they can achieve their objectives without necessarily waiting seven years or losing control of their wealth. Talking about BPR can be a great way to move conversations, whether or not it ends up being part of the solution for that particular client.
What’s the catch?
Clients often want to know why it’s possible to save 40% inheritance tax by making a BPR-qualifying investment.
“There must be a catch,” they think.
The answer is simple. This tax relief exists as an incentive for investors to take on the risk of backing BPR-qualifying companies. These are small or unquoted businesses that are making a valuable contribution to the economy.
BPR-qualifying investments put a client’s capital at risk. The value of these investments, and any income from them, can fall as well as rise. Clients may not get back the full amount they invest.
Clients should also be made aware that tax treatment depends on individual circumstances and tax rules could change in future. In addition, tax relief depends on the companies they invest in maintaining their BPR-qualifying status.
The shares of unquoted and AIM-listed companies can be more volatile than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
Learn more at The Estate Planning Show
A strong knowledge of BPR can help you write inheritance tax business across the board, not just more BPR business, because it neutralises major client objections.
If you’re going to talk to clients about BPR, the more thoroughly you know the subject the better.
So tune in to The Estate Planning Show, a two-part online event on Tuesday 15 June and Wednesday 16 June at 10am.
The show will take you through a variety of estate planning opportunities and share expert tips on how to turn them into planning. Last year’s show was watched by thousands of advisers – so don’t miss it!
Jessica Franks, Head of Tax
1More heirs hit by inheritance tax as families fall foul of gift rules, Financial Times, 4 December 2020
BPR-qualifying investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No. 03942880. Issued: May 2021. CAM011052