BR report 2018

20 21 RESIDENCE NIL RATE BAND IS THE NEW ALLOWANCE ADDING MORE CONFUSION TO IHT? A detailed explanation of how the residence nil rate band works is included in Intelligent Partnership’s “An adviser’s guide to Business Relief”. The following section will examine the impact of this new rule, and whether it has had any effect on investment in BR. The residence nil rate band (RNRB) was announced in the Summer 2015 budget, and was formally introduced in April 2017. 23 As of April 2018, the RNRB will give individuals an additional £125,000 (which is set to rise to £175,000 by 2020/21) to pass to children or grandchildren, on top of the £325,000 nil rate band allowance. This is conditional on assets transferred being the deceased’s main residence. However, the new legislation has been met with confusion since its inception – both from clients and advisers. 70% OF PEOPLE SURVEYED KNOW NOTHING ABOUT RNRB Albeit just before the implementation of the RNRB, an Old Mutual Wealth survey from March 2017 found that 70% of respondents knew nothing of the RNRB allowance. The respondents were UK residents aged 45 and over, with at least £50,000 in wealth. The survey revealed the following misconceptions: 45% did not realise you can select which property to set the allowance against 45% did not realise the allowance will still apply even if the property is sold 40% did not realise any outstanding mortgage is deducted before applying the allowance 36% did not realise property had to be left to direct descendants to benefit from the allowance 29% did not realise the allowance increases Subsequent surveys have provided little or no evidence of improving awareness and understanding of IHT related issues. Rachel Griffin, financial planning expert at Old Mutual Wealth, said: “It is alarming that 70% still have no understanding of the new allowance. Even those who claim to have a good understanding of the residence nil rate band failed to correctly answer some questions on the detail of the new legislation. The lack of understanding around the new rules could result in people not structuring their will or their financial affairs in the most effective way.” The confusion over the RNRB could put the allowance into the spotlight for the OTS’ review of IHT simplification. THE RNRB SQUEEZE ON LARGER ESTATES The rules of the RNRB mean that the new allowance will be less beneficial for estates over £2m. Tony Wickenden, joint managing director at Technical Connection, said: “One of the less expected provisions for the RNRB is that it will be “cut back” by £1 for every £2 the estate of the deceased exceeds £2m. It is worth noting that, in arriving at the value of one’s estate for this purpose, you ignore BR and agricultural property relief and do not add in lifetime gifts made in the seven years immediately before death. In effect, a plain English meaning of estate is taken, unchanged by provisions affecting the IHT liability introduced by legislation.” 24 Much like the nil rate band, the RNRB allowance can be transferred from one partner to another upon the first death. However, Wickenden explained that transfer of allowances to a spouse upon first death may not be beneficial in the cases of BR and agricultural property relief: “If all assets are left to a surviving spouse on the first death, the availability of BR and/or agricultural property relief could be wasted, as the assets will pass exempt to the surviving spouse in any event. In these cases, it may be worth executing the will to pass such assets into trust or in favour of a particular (non-exempt) beneficiary to prevent losing out on the relief.” WILL RNRBDECREASE DEMAND FOR BR? The RNRB will certainly give some individuals an extra IHT allowance that may negate the need for BR investment. However, with house prices in London and the South East skyrocketing over the past two decades, many estates will still be set to benefit from the tax efficient scheme. According to Zoopla, there are now nearly 770,000 UK residential properties worth £1m or more. 25 This accounts for 2.7% of the UK’s housing stock, and confirms that even with the application of the RNRB, IHT will be required on a significant number of estates. “The FCA’s recent paper on the ageing population really highlights how focused all parts of the market need to be in meeting the needs of those aged over 55.” — GILLIAN ROCHE-SAUNDERS, BATES WELLS BRAITHWAITE BR COMPLIANCE The FCA’s recent paper on the ageing population really highlights how focused all parts of the market need to be in meeting the needs of those aged over 55 (yes 55!). BR is a key consideration when thinking sophisticatedly about how to balance estate planning with the client’s requirements for later life, both in terms of one-off and ongoing expenditure. Ensuring all clients, including those in later life, understand products can be challenging, but is key, and good adviser understanding underpins this. Elsewhere in this section some of the key options are discussed – including insurance, unlisted or AIM BR options. One of the challenges we see advisers facing is navigating the various BR structures offered by asset managers. Unlike with EIS, VCT and other tax relief options, fund structures for BR aren’t typically available. This is because a BR fund is highly likely to be classed as an unregulated collective investment scheme. However, the lack of fund structure can make this less familiar territory. ARE KIDS REQUIRED FOR BR? As BR structures are not typically classed as funds, the new Key Information Documents (KIDs) available for many other products are not generally required. The regulation that requires these consumer-facing summaries – the new Packaged Retail and Insurance- based Investment Products (PRIIPS) Regulation – typically applies to fund structures and other packaged products. As highlighted earlier, BR offerings are generally structured as single company offers or discretionary managed portfolios rather than as funds. As a result, you may find that no KID is available, or if the BR provider has created something similar to a KID, it may not have been completed to the same specification as PRIIPS requires. WHAT SHOULD ADVISERS BE LOOKING FOR? Broadly, advisers have two main options from the main BR providers: invest in one BR qualifying company, usually structured as a PLC, or select a discretionary portfolio service managed by the BR provider. In both cases the client receives shares in one or more BR qualifying companies, but what does the different structure mean for you as an adviser? If you’ve decided that BR is right for your client, here are some considerations we suggest asking to narrow down the options: • How many companies are you really accessing? If it is just one or two are you happy with the diversification of trading activity in the likely underlying companies? • With a PLC option you will be undertaking the suitability but with a discretionary portfolio, once you’ve done your due diligence on the provider and their offering, the suitability decision for individual investments is typically handed to the BR provider in question. • If your client’s needs change as they get older, how liquid is the investment? • Do you have the qualification to be able to advise on individual securities (as opposed to retail investment products)? If not, you should.