For those who could not attend our seminar in May, we have created a short article that tackles the hot topic of Inheritance Tax and how to reduce your tax liability through Business Property Relief (BPR).
Tax is always a popular subject and if there is one topic in particular that is guaranteed to rattle some cages, it is Inheritance Tax. No one likes the prospect of giving away 40% of the estate they’ve worked so hard to accumulate over their lifetime, to the Government when they die. Despite Inheritance Tax being one of the more contentious taxes, many people fail to take steps to mitigate it effectively during their lifetime.
According to research by Legal & General, 69pc of people are aware they could have an Inheritance Tax liability, but have taken no action to address the problem. Common reasons not to address the liability include: ‘I can’t afford to give it away’, ‘it’s too risky and complex’, or ‘we don’t know where to start’.
With the Inheritance Tax threshold frozen at £325,000 until 2018 at the earliest, Inheritance Tax planning is as important as ever. Inheritance Tax can cost your loved ones £100,000s in the event of your death. However, with a bit of careful planning, it is possible to legally mitigate against Inheritance Tax, Business Property Relief is one way of doing this.
What is Business Property Relief (BPR) and how can this help me avoid Inheritance Tax?
The more traditional routes of IHT mitigation are through gifts and trusts. However, money given away before you die is usually still counted as part of your estate, so if you die within seven years of giving the gift, it will be subject to Inheritance Tax.
Business Property Relief (BPR) for those that own a business?
If you run a business, there are generous inheritance tax reliefs available that operate to make assets used in the business exempt or partially exempt from IHT. Business Property Relief (BPR) allows you to pass on either 50% or 100% of your business, tax free when you die. BPR was introduced by Labour government in 1976 with the intention to encourage and help family businesses to continue and be passed down the generations. However, not all businesses qualify for Business Property Tax Relief.
Business property relief will be given at 100% on the following assets:
- A business (that is a sole trader’s business) or an “interest in a business” (typically, a partnership)
- Shares in an “unquoted” (not traded on a Stock Exchange) company – note that shares traded on the AIM or USM are treated as “unquoted”. This is the relief that can apply to family companies.
Business property relief will be given at 50% on the following assets
- Land, buildings, machinery and plant used by a business run by a partnership of which the owner is a partner, or by a company in which he/she owns a controlling interest.
A business or company will not qualify if more than half of its business involves:
- Dealing in stocks and shares
- Dealing in land or buildings
- Making and holding investments
In order to claim BPR, the individual must have owned the relevant business property for at least 2 years before his or her death, the relevant business property must not be subject to a binding contract for sale at the time of its transfer and the business must be actively trading.
It is important not to assume that your business or company qualifies for 100% IHT relief. There are no lights that start flashing if your business stops qualifying for BPR, so it is vital that you consult a financial advisor to find out whether full business property relief is available on your business. If not, they will be able to advise you on the other options available.
What if you don’t own a business, can you still benefit from Business Property Relief (BPR)?
The quick answer is yes and what is more it is actually very simple.
There are investment products out there specifically designed to take advantage of BPR with a view to IHT planning.
A common way to mitigate the IHT on your estate is to gift money or assets to a relative or loved-one. The downside to this is twofold. Firstly, it generally takes seven years before the gift is fully exempt from IHT. Secondly, because it is a gift, the money or asset is no longer yours and you lose control of it.
Despite the best laid plans, no one can be sure of what the future holds, so not having control over money you’ve worked hard for, in an effort to mitigate IHT, is less than ideal.
Investment products have now come on to the market, utilising BPR, which let investors mitigate their IHT liability whilst still retaining control of their money. Unlike traditional gifting, investments in these products are exempt from IHT within 2 years. On top of this and unlike other IHT solutions, you retain access to your investment at all points and what is more, you can choose to take a regular withdrawal from the product or leave any returns in the investment.
If it sounds too good to be true, it is worth pointing out as always, that with all the benefits, comes a degree of risk and there is always a chance that the value of your investment may go down as well as up.
However, with IHT currently at 40%, many will feel the benefits far outweigh the risk.
So, whether you stand to inherit or leave the money, it's time to sit down and tackle the issues of Inheritance Tax with both your family and a financial adviser. By taking the time to receive appropriate financial advice, you can reduce or eliminate your potential Inheritance Tax liability, without losing control of your estate.