19
“BPR qualifying investments provide advisers with a useful and complementary solution to
existing mainstream planning routes”
Nick Morgan, Partner, Foresight Group
ASSET REPLACEMENT
STRATEGIES
E
IS
The Enterprise Investment Scheme is
a long-standing government initiative
to encourage investment into small
and medium sized businesses. The
rules which govern whether a company
qualifies as EIS eligible are actually much
stricter than the rules for BPR, so EIS
qualification is de facto BPR qualification.
That means that after two years the
investment is fully exempt from IHT.
An investment into an EIS qualifying
company has additional tax reliefs:
investors will get up front income tax
relief, CGT relief and loss relief. However,
the stricter rules mean that EIS qualifying
companies are smaller, higher risk
companies, so these generous benefits
can only be accessed if investors are
prepared to take on more risk.
* For more information on EIS investments,
download a complimentary copy of our 2014
EIS Industry report.
EIS AND BPR
EIS and BPR are sometimes used in
combination - if clients have surplus
investable assets, an EIS investment is
used to maximise the income tax relief,
or defer tax on gains elsewhere, and the
remainder is placed into a BPR product
for the IHT mitigation.
Another possible combination is moving
a client into a BPR product after they
exit an EIS investment - retaining the
100% IHT exemption without having to
restart the two year qualifying period.
The three year BPR replacement assets
window gives ample time to implement
this solution. Limited life (“exit focused”)
EIS can be used in this scenario -
growing funds for a period of 4-5 years
at the same time as qualifying for IHT
relief, then moving them into a lower
risk BPR trade, retaining the relief.
Finally, this could be attractive for
EIS renewable energy investors.
Renewable incentives are no longer
allowable within an EIS, and there is
not a comparable asset backed, low
risk opportunity in the EIS universe.
However, the renewable incentives are
allowable when claiming BPR. The sorts
of clients who invested in renewables
via EIS, can do the same via BPR.
LIFE ASSURANCE
Life assurance falls into a slightly
different category - it doesn’t mitigate
the IHT bill at all, it simply sets aside
some money to pay for it so that
the estate can be passed on intact.
Generally the policy is written in trust
and the pay-out is made outside the
estate, so the death benefit is used to
meet the IHT liability. It can be paid
for with a single lump sum or monthly
premiums, but the cost of the policy and
access to this product will depend upon
the insurer’s assessment of age, lifestyle
and health status - in cases of poor
health it may not be available at all.
HOW DOES BPR COMPARE?
BPR is an asset replacement strategy.
The two biggest advantages BPR has
over the other solutions available are
that it doesn’t entail any loss of control
and it can be 100% effective within two
years.
Another big benefit is the simplicity
of the solution - no complex legal
structures or careful planning of the
amount and timing of gifts is required
and there is no need to grapple with
POAT (Pre-Owned Asset Tax) or GWR
(Gifts With Reservation) provisions.
However, the investment capital is still
at risk. This is a double edged sword of
course - the downside risk comes with the
potential upside of growth and income.
Investors with enough wealth and
sufficient income are likely to want to use
up their gifts-from-income allowances
first and foremost and more cautious
investors may still prefer to use trusts
to keep the assets in very low risk. But
planning for long lives is difficult and
the flexibility that BPR investments offer
cannot be ignored. At the other end
of the scale, clients who want swift IHT
mitigation should also be considering BPR.
SUMMARY
This is a statutory relief that is well
established, and over the years a set
of products has developed to help
investors utilise BPR. There are clear
advantages and disadvantages when
compared to other IHT mitigation
solutions, and whether to use BPR at
all and if so how much to allocate will
always vary depending upon the client
circumstances. In most cases, it would
seem to best to use BPR as part of an
overall estate planning strategy.
“We recommend that advisers
look for a fund manager
with deep sector expertise
and a track record of wealth
preservation, plus attractive
liquidity provisions”
Matthew Bugden, Ingenious
Source: National Audit Office
( 2010 - 2011 )
260,000 notified for probate
36,000 estates valued at above the
tax threshold
20,000 did not have to pay any
inheritance tax because of the value
of reliefs and exemptions they were
able to claim
560.000 deaths
Most estates were not
notified for probate
because there was a
surviving spouse or
because they were
relatively small
Inheritance tax is an example of a
tax which under HMRC’s definition,
provides progressivity in the tax
system by ensuring the burden falls
most on those who can most afford
to pay. It is unlike most other taxes in
that the amount of relief far exceeds
the amount of tax collected. Several
reliefs define the scope of the tax and
the value of these reliefs in 2012-13
was £22.4 billion, seven times the
value of tax collected. The biggest
relief is obviously the nil rate band,
which accounted for £18.4 billion of
relief in this period.
SCOPE OF IHT RELIEFS
