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How Alan’s adviser helped him kickstart his estate planning

Let’s consider a client scenario.

John has been Alan’s financial adviser for 27 years. For most of that time, Alan ran his own business. Alan is a widower, so was reluctant to retire, but two years ago, he finally decided to sell the business. In the event, he received £3 million.

Alan wanted to invest around half the proceeds to generate a retirement income, which John helped him do soon after the sale of the business went through.

Selling the business did create a problem, though. John made Alan aware that now he’d sold his business, he was left with a substantial inheritance tax liability. Without planning, this would reduce the amount his three daughters would receive when he dies.

Alan agreed that this is something he wanted to plan for. But at the time, having just retired he was preoccupied with generating an income and using his free time to travel. So, he left the estate planning for another day.

One year later, and unfortunately Alan has developed some serious health issues. He decides that it’s now or never to do some estate planning. John cautions him that traditional forms of estate planning, such as making lifetime gifts, can take seven years to become fully free from inheritance tax.

However, Alan does have another option.

John has some good news for Alan

Had Alan passed away when he still owned his company, his shares in the business would have been expected to qualify for Business Property Relief (BPR), a longstanding relief from inheritance tax. This would have meant he could have left those shares to his daughters free from inheritance tax.

Ordinarily, a new investment into BPR-qualifying shares must be held for two years before it is free from inheritance tax. However, John has some good news for Alan.

John explains to Alan that there’s a three-year window following the sale of a business that qualified for BPR. During that period, if Alan uses some or all of the proceeds from the sale of his business to purchase another BPR-qualifying business, that new investment should immediately qualify for BPR. The same is true if Alan invests the proceeds in the shares of a BPR-qualifying business managed by someone else, or in a BPR-qualifying investment portfolio.

This comes as a huge relief to Alan, who had been worried that he’d left estate planning too late.

Based on Alan’s objectives and attitude to risk, John recommends investing £1 million into a BPR-qualifying portfolio managed by a specialist manager. By making the investment John recommends, Alan would hold shares in a portfolio of unlisted or AIM-listed companies that would be expected to be able to be left free from inheritance tax to his children when he passes away.

BPR-qualifying portfolios are higher risk investments than Alan’s portfolio of listed equities, and the tax relief is designed to compensate investors for the risk they take.

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