Estate Planning Guide

49 48 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS Business Relief This section looks at assets which qualify for BR or AR. BR was originally enacted in 1976, to enable family businesses to be passed down through generations without incurring an IHT liability that would require the business to be sold or broken up. Since then, changes to BR have widened its scope in addition to making qualifying assets an attractive investment opportunity for individuals as part of their estate planning. BR qualifying assets potentially become fully relieved from IHT after two years (provided that the investment qualifies for 100% BR rather than 50% as is also available in some cases, assuming there are no ‘excepted assets’ (explained further below), and provided that the asset is still held at the date of death). This is as opposed to seven years for gifts and trust solutions. Investing in BR qualifying assets also allows clients to retain full ownership of and access to their investment at all times subject to liquidity. This potentially makes them more attractive for short term planning or to those who wish to settle assets into trust without impacting their available NRB or incurring tax on the lifetime transfer. Like other investment-based planning strategies, many BR qualifying investments offer the opportunity of a return, with the estate planning services offered by investment managers targeting investment growth or income ranging from 2% to 7% per annum. There is generally no medical underwriting (as necessary to take out a life insurance policy) or complex and costly legal structures required. This means that BR is also an option where a LPA is in place: attorneys need the approval of the Court of Protection to make gifts, but as BR is simply an investment, although care is needed, court approval may not be necessary. In addition, BR qualifying assets benefit from replacement property relief (a form of rollover relief), so that if an investor disposes of BR qualifying assets, without holding assets for the minimum two year holding period, there is broadly a three-year time frame to reinvest the proceeds and retain the prior ownership period, without having to restart the two- year qualifying clock. As such, BR qualifying assets must have been held for two out of the preceding five-year period at the point of death or any other CLT. However, the investment needs to be made (it cannot be in contemplation). Qualifying investments include unquoted companies and those quoted on the AIM and PLUS markets, although some specific industries/activities are ‘excluded’. So, if the company deals in shares, makes or holds investments, or deals in land or buildings (although property development companies are eligible, whilst property lettings businesses are not), its shares will not qualify for BR. The qualifying activity must constitute at least 50% of the firm’s activity, if this is not the case, none of the activities will qualify for BR. Companies must also be ‘actively trading’ in order to qualify for BR. 2.6 Using BR in estate planning can enable the client and their beneficiaries to mitigate IHT with a greater degree of access and control, along with potentially benefiting from the investments made in BR-qualifying assets. JERRY PRICE, CHIEF DISTRIBUTION OFFICER, BLACKFINCH BR Timeline The relief is intended to protect family businesses from having to be sold to fund IHT bills, and also to direct investment into unlisted trading companies which will often carry higher risk and be potentially less liquid than mainstream portfolio assets. These risks can be offset, to some extent, by skilful investment selection and sufficient diversification, by identifying project-based opportunities (where a company is set up to complete a specific project, for example the development of a solar farm or an hotel) or where there are tangible assets which can provide some degree of capital protection, or by a combination of all three. Specialist asset managers provide portfolios that qualify for BR, investing in portfolios of listed companies or other unlisted companies that may qualify for 100% BR. AIM listed shares offer the potential of greater liquidity. Outside of an ISA BR qualifying investments will not mitigate IT on income generated, or CGT if and when shares are sold. This might happen, for example, if a portfolio company planned activity which would cause it to cease to qualify for BR when the investment manager would generally sell any relevant shares. However, the option (provided by a wide variety of investment managers) to hold AIM listed shares that potentially qualify for BR within an ISA offers relief from both IT and CGT, as well as IHT. It is not generally possible to be certain at the outset that an investment will qualify at the relevant time (usually on the investors’ death – although in certain circumstances a non-statutory clearance from HMRC may be available). BR is assessed by HMRC on a case by case basis at the time a claim is made. One of the scenarios under which an investee company could lose its BR qualification is if it changes its activities so that it is undertaking activities that are “wholly or mainly” non-qualifying for the relief or if the company lists on a recognised stock exchange. Or, excepted assets may reduce the BR available by their value. This means that the manager’s experience, their understanding of the qualification criteria and the implementation of regular, detailed reviews of the investments are important considerations. A long track record of shareholders being granted BR in the portfolio companies they invest into is certainly reassuring as, if a company ceases to qualify for BR before the investor passes away or gifts assets (a chargeable event), no relief will be granted. 1976 30% BR Relief established 1987 50% BR Relief established 1992 100% BR Relief introduced 2014 0.5% stamp duty on shares traded on AIM was abolished 2013 Rules changed so that the use of debt to acquire BR assets invalidates IHT mitigation. AIM shares became eligible to be held in an ISA. 1996 The 100% relief was extended to minority investors in a qualifying company. Fund managers started to build share portfolios for individuals.