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Background – What is IHT?


In its very simplest terms, inheritance tax is the tax paid on an individual’s assets when they pass away. Assets can include money, investments and property – the estate, which is usually passed to, or inherited by the friends and family of the deceased.

Should the value of the ‘estate’ (minus any debts outstanding) be valued in excess of £325,000, otherwise known as the nil rate band (NRB), a 40% tax is levied on the amount in excess of this threshold.


To illustrate the impact of this:

Estate value:       £525,000

NRB:                  £325,000

Taxable Estate:   £200,000 @ 40%

IHT Bill:              £80,000


Married couples are able to pass their estate to each other tax-free on death along with any of their nil rate band not used. This can potentially boost their NRB to £650,000 for the remaining widower.


The Growing Problem


Although once perceived as a problem only for the wealthy, an ever increasing number of people are finding themselves falling into an IHT liability. According to the Office of National Statistics, over £3.4bn was raised during the 13/14 tax year through IHT, £300m than the year before, meaning that IHT receipts have increased a substantial 43% since the 2009/10 tax year.

The well documented rise is asset prices we have seen in recent years, especially across London and the South East where house prices have risen on average 17.8% and 14.4% respectively in the last twelve months. The average house in London now costs on average £406,730 meaning that the number of people set to fall into the IHT trap is only set to increase.

The issue is further exacerbated by the nil rate band currently being frozen at £325,000 until 2018/19. Despite suggestions from various political quarters that the NRB will be increased to potentially £1,000,000 we can only plan for the current situation, not how it may develop in the future. This leads me onto how Business Property Relief (BPR) can help to reduce one’s IHT liability.


The solutions & specifically why look at BPR?


Unlike many of the alternative IHT solutions that are out there such as; gifting, trusts and equity release BPR offers a quicker and more flexible solution to the issue. Unlike trusts and gifting which are often complex and involve relinquishing ownership and control, BPR does not, meaning that should the tax landscape alter and the NRB be raised then any investment decision could potentially be reversed.


What is BPR and how does it work


BPR was introduced back in 1976 in order to allow small family businesses to be passed down from generation to generation without triggering an IHT liability. Since then those companies that qualify for BPR has been expanded, making it an attractive tax planning tool for individuals. Shares in BPR qualifying companies are zero-rated for IHT purposes after only two years, in other words they are outside your estate after 24 months.


There are three ways BPR can be accessed; EIS (which we discussed in our previous article), AIM portfolios (which we’ll discuss next week) and ITS strategies. The latter option are usually discretionary management services structured and managed by investment managers, who give investors access to a one or a number of underlying companies which qualify for BPR. These ITS strategies have grown in popularity in recent years, although often they are regarded as high risk in nature due to their investment being in small unquoted businesses. It is important to look at the risk in the underlying trade of the business and experience of the management team running the service when considering a client’s suitability.

Commenting on how BPR can be used, James Cranmer, a Partner at Triple Point says, “At Triple Point we have been using BPR to help investors mitigate their IHT exposure since 2006. It provides them with the fast and simple solution they are looking for. We can give investors access to businesses active in leasing and infrastructure funding, a popular choice with investors looking for rapid IHT mitigation and capital preservation.”


BPR Benefits


  • Speed: Unlike many other forms of estate planning such as trusts and gifting which can take up to seven years, BPR is outside your estate after two years
  • Flexibility and Control: As mentioned earlier, because you own the shares you retain control, you can top-up or redeem as you need
  • Simplicity: BPR is relatively straightforward, there are no complex legal structures, medicals etc.


BPR’s role for investors


Often for those clients where either there are legal or medical complications BPR can often offer a solution to help reduce an IHT liability. Because an investor owns shares to qualify for BPR it can make it particularly attractive for those clients with Power of Attorney in place as there are no issues with relinquishing control of the assets.

Obviously the speed at which BPR assets can be removed from one’s estate (two years) compared to some other planning ideas such as trusts and gifting (seven years), which can take up to five years longer make it an option for those that need to act more quickly.

As always it is important to consider client’s individual situation when considering BPR. It will not be suitable for all and there is a huge range of differing strategies and ways to access BPR that will work for different clients.

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Please do not hesitate to get in touch for further information on LightTower Partners or on the investment products we distribute.

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