Last month, we welcomed PXN Group’s Caroline Flagg, Deputy Managing Director of the PXN Investments retail business, onto a Tax-Efficient Investment (TEI) special edition of IFA Talk. In this episode, we discussed the changing Business Relief (BR) landscape, along with PXN Group’s recent merger.
Last week, we brought you a summary of the PXN Group merger, so this week, let’s take a look back at everything which Caroline covered on BR and Inheritance Tax (IHT) relief. These types of investments can be higher risk and they can be more illiquid than other potential assets.
Evolving role of BR
Before diving into the upcoming BR changes Caroline, began by looking back at previous Budgets, with BR receiving a lot of airtime in the national press. The legislation around business relief is actually 50 years old this year, so it’s not anything new, but as Caroline explained, it is clearly going through a transitional period.
She stated that, for a long time, BR sat in a niche corner of the planning world. It was a tool which advisers utilised in specific circumstances. BR was usually used with older clients who had either exhausted other options, or were in poor health and didn’t have time for more traditional forms of estate planning.
The rule changes which came into effect this tax year have already restructured the market significantly, with AIM-listed shares now only qualifying for half of the relief that they used to.
“There has been a huge shift from AIM into the unquoted world, because unquoted BR solutions still qualify for 100% relief on the first £2.5 million per person. Crucially, couples can share those allowances, so if you have a husband and wife, they’ve got up to £5 million per couple.”
Caroline Flagg
Caroline described this as a “significant repositioning”, with a lot of people being very happy if they could achieve £5 million per couple in business relief over their lifetime. Caroline revelaed that she believes many advisers are still working through the full implication of these changes with their clients, which is where PXN Group come into play.
“The biggest shift is what’s coming in 2027. When the pension assets come within scope of inheritance tax, we will have a generation of clients who have historically built their wealth and used the pension pot as the primary succession vehicle.”
Caroline Flagg
Caroline explained that these people have been utilising their ISAs and GIAs, leaving their pension untouched to pass down their legacy. She expects pensions to go back to being an income in retirement vehicle, rather than an estate planning tool, noting that this strategy needs a fundamental rethink.
This leads to the question of, where do you deploy your clients’ capital to achieve a similar outcome? Caroline noted that BR isn’t the answer for everyone, but if it’s used alongside other traditional planning tools, it is one of the most compelling solutions available.
“It’s quick. It’s two years versus seven years, and clients can remain in control of their assets for their lifetime. There is no loss of access, there’s no gifting, there’s no trust structures. It’s actually estimated that 10,500 additional estates will now fall into the IHT trap when this pension change comes in next year.”
Caroline Flagg
Caroline added that, while this number seems small in terms of the overall population in the UK, many of these clients won’t have taken estate planning advice yet. This presents a significant opportunity for advisers.
“What I would say to advisers is, the two year clock is already ticking. No one knows when their demise is going to be, and the advisers who are having these conversations now with existing clients and with new clients will be the ones who are thanked by those clients in two years’ time.”
Caroline Flagg
Other areas of value
Caroline noted that she has seen multiple areas of promise beyond BR, notably inheritance tax and estate planning.
“The combination of frozen nil rate bands that we’ve been hearing about for years is running to 2031. At the same time, you’ve got rising property values, you’ve got the pension inclusion changes arriving, meaning that we’re just looking at a growing pool of clients who need this solution or a solution within that space.”
Caroline Flagg
Caroline highlighted the meaningful shift, adding that any advisers who haven’t revisited their BR conversations or estate planning conversations in the last 12 months with clients really should.
Along with IHT and estate planning, Caroline stated that “big isn’t always best” when it comes to retail asset managers.
“The newsreels are full of high-profile trusted investment managers, big names who’ve collapsed, who’ve experienced extraordinary decline in asset values or fund suspensions, and that is across the whole of the UK financial services market.”
Caroline Flagg
In the tax-efficient investment space, PXN Group have seen a movement towards additional diversification, both at a manager level and at an asset class level. Large business relief managers once expected 100% of flow, which goes completely against the grain of how financial advisers operate when diversification is always really key.
“Importantly, I think size doesn’t actually guarantee performance, nor does it guarantee liquidity, and the dominance of the large players in this space is rightly being challenged by new entrants to the market who can provide a track record of performance in their sector and liquidity on a regular basis, but also liquidity in a doomsday scenario, such as inherititance tax being abolished due to change of government or business rules changing yet again on the tax relief side of things.”
Caroline Flagg
PXN Group operate in the private credit and SME lending market, a diversifier from other BR solutions in the market. Caroline reveals that, over the last 15 to 20 years, they have seen the major banks largely retreat from direct SME lending, particularly at the smaller end.
“That has created a genuine gap, and it is one that Praetura have successfully been filling for the last 13 years. We have lent into businesses that are growing, profitable and credit-worthy, but are under-served by mainstream finance.”
Caroline Flagg
Listen to the full episode on our website here, or by heading over to Spotify, Apple Podcasts, and Amazon!
