BR Guide FINAL 20 Feb

18 THE CASE FOR BR 19 THE CASE FOR BR 2.2 Benefits and Risks Speed Unlike gifts, BR qualifying investments are 100% exempt from IHT after a two-year holding period Access Subject to liquidity, BR investors can exit their investment at any time to access their funds Growth The estate planning services offered by investment managers target investment growth typically from 2% to 7% p.a. Simplicity As an investment, there is no medical underwriting or complex legal structures required. This means that BR is also an option where an LPA is in place: attorneys need the approval of the Court of Protection to make gifts, but as BR is simply an investment, attorneys can use BR as an estate planning strategy Rollover Relief In addition, BR qualifying assets benefit from rollover relief (also known as replacement relief), so that if an investor disposes of BR qualifying assets after the minimum two-year holding period, there is broadly a three- year time-frame to reinvest the proceeds and retain the relief, without having to restart the two-year qualifying period. There is also no medical underwriting as, for example, is required to take out a life assurance policy, and costly legal structures are not required, unlike conventional gifts and trusts. However, the investment needs to be actually made (it cannot be in contemplation). Key Risks Key Benefits Investment Risk Investments into unquoted small and medium-sized enterprises are always going to be deemed high risk as, statistically speaking, smaller companies fail more often than larger, more established companies. These risks can be offset, to some extent, by skilful stock selection and sufficient diversification, by identifying project based opportunities (where a company is set up to complete a specific project, for example a solar farm or a hotel) where outcomes are less uncertain, by investing in opportunities where tangible assets can provide some degree of capital protection, or by a combination of all three. Liquidity Even though ongoing access to funds is one of the advantages BR has over other estate planning options, liquidity can be limited due to the nature of the underlying assets. There is no large-scale active secondary market in unquoted shares and managers therefore achieve liquidity by matching inflows and outflows (matched bargain), selling assets, a share buyback, or by retaining a cash buffer as part of the service. Although managers often aim to facilitate withdrawals within weeks, this is not guaranteed, particularly in the event of a downturn or any event which prompts a high number of redemptions. AIM listed shares offer more liquidity, but some holdings may still take some time to liquidate and may have to be sold at a discount in order to achieve faster liquidity. Finally, the two-year qualifying period imposes an investment horizon of at least two years before withdrawals are advisable. Tax Risk There are four principal scenarios where relief might be lost: a qualifying investee company changes its activities so that it is undertaking activities that are “wholly or mainly” non-qualifying for the relief (dealing in securities, stocks or shares, land or buildings, making or holding investments), the company lists on a recognised exchange, the government changes the rules, or the investor has either not owned qualifying assets for the minimum holding period or was not holding the assets at the date of death or time of chargeable lifetime transfer. However, the ownership test is treated as satisfied if the property replaced other business property eligible for relief, provided that the combined period of ownership is at least two years out of the preceding five years. The risk must be considered in the context of: • Doing nothing: the value of the estate that exceeds the NRB and RNRB allowances is guaranteed to be taxed at 40%. • The advantages of BR against the risks of other estate planning solutions. They may have less investment risk or tax risk attached to them, but that comes at the price of lower levels of access, flexibility and growth. The longer holding period required also means that other estate planning solutions have a higher risk of not achieving IHT mitigation on death. Alongside the many ordinary family businesses that qualify for the relief, there is a large and growing market for BR ‘products’ for investors. HM Treasury (HMT) estimates that at least £4 billion is invested via BR products. FINANCING GROWTH IN INNOVATIVE FIRMS CONSULTATION, HM TREASURY, AUGUST 2017