BR Guide FINAL 20 Feb

66 A PRACTICAL ROUTE TO BR Claiming the Relief BR has to be applied for by the deceased investor’s estate or by the individual in most cases of lifetime transfers and cannot be guaranteed upfront (unless there has been a successful lifetime transfer). To obtain IHT relief using BR, the executors of the estate will need to fill in both form IHT400 (Inheritance Tax Account) and schedule IHT412 (Unlisted stocks and shares, and control holdings) or schedule IHT413 (Business or partnership interests and assets). SCHEDULE IHT412 applies if BR is being claimed on shares (including shares listed on AIM and shares traded on OFEX). SCHEDULE IHT413 applies if BR is being claimed on an asset used in a business or if the deceased owned a business. These must be sent to HMRC within 12 months of the end of the month of death. Failure to do so may lead to a penalty of £200. Should the delay extend to two years after death, an additional £3,000 could apply. For unlisted share valuations, the BR should be valued on an open market basis. AIM share valuations can be found by visiting the AIM pages of the London Stock Exchange website: http://www.londonstockexchange.com/companies- and-advisors/aim/aim/aim.htm 6.4 from IHT. SALE OF THE COMPANY BR is not available if there is a binding arrangement to sell the business, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company. Basically, HMRC only wants to give relief on businesses that will continue after the shareholder’s death. However, the common arrangement that the deceased shareholder’s shares be purchased by the remaining shareholders is fine, provided this was a cross option arrangement which applied to all shareholders. FEES AND CHARGES BR is only given on amounts subscribed for qualifying investments, so any initial charges deducted or amounts held in cash will not be eligible for tax relief (although they will of course not be subject to IHT either). LIQUIDITY GENERATION If the liquidity for an exit was created by a share buyback instead of a matched bargain (matching inflows with outflows), then the investor may be subject to income tax rather than CGT. This will be dependent on how BR product managers structure and operate their service. ISA CAPITAL LOSSES OFFSETS Capital losses within an ISA (which is a tax exempt vehicle) aren’t eligible to offset against other capital gains. Therefore, the use of ISAs for unquoted shares needs to be carefully considered with an investor’s appetite for risk. VENTURE CAPITAL SCHEMES Whilst shares in EIS are likely to qualify for BR, shares in Venture Capital Trusts (VCTs) do not qualify for BR as VCTs are listed companies. EDWARD GRANT FPFS CHARTERED MCSI, DIRECTOR, TECHNICAL CONNECTION CHARTERED FINANCIAL PLANNER, CHARTERED WEALTH MANAGER Fundamentally, Business Relief needs to be considered as an investment with additional IHT advantages. In spite of the growth of BR solutions over recent years as providers have sought to develop retail focused investments, it goes without saying that no matter how much they seek to mitigate risk they remain high risk investments in unquoted trading companies. However, in today’s mature market there is clear past performance for some trades making it an asset class to be considered for suitable clients with an appropriate risk appetite. It is important to identify within your client profiles those for whom BR might be suitable. The client should have considered the following measures prior to investing into a BR solution: • Will and nil rate band planning; • Redirecting potential inheritances; • Placing life assurance and death benefits in an appropriate trust; • Not taking retirement benefits. Advisers must also ensure the client has a high capacity for loss for the BR portion of their portfolio, and it is reasonable to expect that they have sufficient levels of emergency and other deposit funds. If these criteria are satisfied, the two key markets where BR solutions are useful are: • clients who have sold shares in a qualifying business and have lost their BR; • clients with an IHT liability they wish to mitigate. Loss of BR is an excellent topic of discussion with accountants who will have clients who have sold their business or are looking to do so. Meanwhile, solicitors often have clients who are concerned about IHT but do not want to gift their money away, particularly if they are worried about long term care costs. They may also have clients who have lost capacity and the attorneys are unable to gift money on their behalf. In this situation, BR solutions enable the asset to be exempt from IHT after two years whilst not leaving the estate. When reviewing BR products, understanding the trade and the manager’s experience in successfully operating the trade is key. The trades can be very specific with their own individual risks, making additional questions beyond the standard due diligence important. Due diligence may also include meeting the managers to discuss issues such as ‘successful deaths’, any underperformance of investments and what action the manager has taken as a result, when independent analysis was last updated, and, if it has been more than 12 months, why? That said, advisers should not rely upon the fund managers’ material exclusively. For larger investments, it is also appropriate for the client to meet the managers so that they too understand the risks. If the client is elderly, then ensuring the family understands the liquidity issues is also key. HOW BR CAN BE SUCCESSFULLY INCORPORATED INTO FINANCIAL ADVICE AND PLANNING OFFERINGS Integrating BR To download form IHT400 (Inheritance Tax Account), go to: https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/622901/IHT400_06_17.pdf To download schedule IHT412 (Unlisted stocks and shares, and control holdings), go to: https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/373591/IHT412.pdf To download schedule IHT413 (Business or partnership interests and assets), go to: https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/373593/IHT413.pdf For more information about suitability, go to section 3.3 of this Guide. For more information about due diligence, go to section 4 of this Guide