Business Property Relief (aka Business Relief)Since 1976 Business Property Relief (BPR) has allowed small businesses to be passed through the generations without incurring an Inheritance Tax (IHT) liability.
Business Property Relief involves investing in investments that are high risk and can be difficult to sell, and will only be suitable for experienced investors who understand the risks.
Business Property Relief Qualifying Investments
Alternative Investment Market (AIM), Business Property Relief Schemes and EIS invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.
Since 1976 Business Property Relief (BPR) has allowed small businesses to be passed through the generations without incurring an Inheritance Tax (IHT) liability.
The scope of BPR has evolved over the years to become a method of investing for individuals looking to reduce a potentially large IHT liability at the time of their death.
The features of a BPR solution that are very useful for IHT planning are:
- The money is accessible.
- It is effective for IHT purposes after just 2 years.
- There is also a solution that incorporates a 2y term assurance for a day 1 solution.
- The income that is provided is technically a capital gain.
- It is common for returns and ‘income’ from BPR schemes to be structured as capital gains, which can provide be an effective way to reduce or avoid tax on payments from the scheme by using your Capital Gains Tax exemption.
ISAs for BPR
It is not just the designated IHT schemes that qualify for BPR. Any small business shares could qualify, so long as the business is trading and not listed. This includes EIS investments and investments in the AIM market.
This allows an investor to introduce more diversity if they are utilising this exemption for IHT by spreading their net a little wider. This is generally a good practice as diversification is king.
As of April 2013 you have been able to invest your ISA in to AIM shares, which after 2y can effectively make your ISA IHT efficient, without having to give up the other tax benefits of holding large amounts of capital in ISAs.
Business Property Relief qualifying investments for IHT Planning (in practice):
Access to funds is one of the most undervalued tools in IHT planning.
IHT planning starts with ‘how much do you need for your lifetime.’ This is a very difficult question to answer and with maximum respect a question that you will probably answer wrongly.
Should you live longer than expected or need more than is expected, you want to know that there are funds that can be utilised. Like with Flexible Reversionary Trusts, a BPR qualifying investment is one of very few tools that fit the bill.
However, we would say to use other money that doesn’t qualify for exemption first.
In practice, these types of investment are high risk, and are not appropriate for everybody. Even experienced investors who understand the risks should not allocate large amounts of their capital to these kinds of investments.
We would generally look for other solutions if you have enough likely time available, but may combine solutions if you also have a very high taxable income and are not utilising your capital gains annual allowance.
If you are short on time, this is definitely going to be a very useful investment type to mitigate IHT.
TAKE CARE – The tax treatment of these schemes cannot be guaranteed. In order to benefit for relief and IHT benefits these schemes have to continue to meet rules set by the HMRC. HMRC assess every claim for IHT relief based on investing in a BPR scheme individually to see if the investment qualifies.
Schemes that promote these schemes have usually consulted with HMRC first, so with care, undesirable outcomes can be minimised: we feel this highlights the value of advice.
Business Property Relief Schemes invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.