Estate Planning Guide

BR Qualifying Conditions for 100% IHT Relief Unquoted shares in qualifying ‘trading’ companies (a business run on a commercial basis with a view to profit), subject to the relevant conditions, qualify for 100% relief from IHT with the benefit of BR and shareholders need not be a director, work full time in the company or hold a minimum number of shares. The shares can also be preference or non-voting shares. The shares must be held for at least two years prior to death. — But qualifying investments may also be treated as satisfying the two-year minimum ownership period where they replace (either directly or indirectly) other relevant assets that potentially qualify for BR. The replacement asset needs to qualify as relevant business property and must be bought within three years of the disposal of the original relevant asset. BR applies, provided the ownership periods of qualifying assets total at least two years in a continuous five-year period. — And, if the property was inherited, it is deemed to have been owned from the date of death, unless it was inherited on the death of a spouse or civil partner. In this case, the surviving spouse or civil partner will be treated as having held the relevant asset from the original date of investment, rather than the date of death. 1 3 For the purposes of BR, HMRC defines unquoted shares as those which are not listed on a recognised exchange. However, the Alternative Investment Market (AIM) and the NEX Exchange (NEX), formerly known as PLUS, are not considered by HMRC to be recognised stock exchanges, and therefore suitable shares listed on these markets are eligible shares for BR. (Consequently, reference to unquoted or unlisted shares throughout this Guide includes AIM and NEX listed shares.) Since 2013, AIM shares have been eligible for inclusion within an ISA, and by investing in eligible shares it is possible to have an IHT exempt ISA. 4 If a company has an eligible activity as its main activity (more than 50% of activity) but is also involved in a non-qualifying activity as a minor part of its business (less than 50%), the entire shareholding should still qualify for BR subject to any expected assets. 5 It would not be effective for an investor to use debt to purchase BR qualifying investments: the liability will be added back into the investor’s estate. 6 Since BR involves investment where the investment asset continues to be held in the name of the investor rather than disposing of the asset by gifting ownership to another party, it can provide a simple solution when an LPA is in place. 7 Any assets within a business that are not deemed to be used for the purposes of carrying on the trade of the business or for an identifiable future use in the business will not qualify for BR (known as ‘excepted assets’ as previously explained). The effect is a proportionate reduction in relief. This can include large cash reserves. 8 If the business is subject to a binding contract for sale, then it will not qualify for BR. However, there is an exception to this rule where there is a properly drafted cross-option arrangement in place that enables a business to pass into the hands of surviving shareholders, which should be standard practice in many businesses. 2 The company’s main activity must not be non- qualifying. So, if the company mainly 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), then the shares may either not qualify for BR or will qualify with some proportionate reduction in relief in relation to the value of the non- qualifying assets held. The relevant conditions that must be met are: 50 ESTATE PLANNING OPTIONS Relevant asset sold Relevant asset sold after ownership in 3 of last 5 years Reinvestment into relevant asset Reinvestment into relevant asset YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 Death of holder of relevant asset Example of replacement business property OWNERSHIP OF RELEVANT ASSET What is a Chargeable Lifetime Transfer (CLT?) Any transfer (broadly gifts) made during the donor’s lifetime that is not an exempt transfer or a PET. Examples of transfers that do not qualify are a transfer into a discretionary trust, because the gift is not to an individual or one of the specified trusts to which CLTs apply, and a transfer to a company. The rate of tax for lifetime transfers that exceed an individual’s NRB is 20% (subject to any reliefs). Although there are the traditional options to mitigating IHT, such as gifts, trusts and whole of life insurance, BR investments offer a valuable addition that can do a lot to meet clients’ needs. Having a much shorter period (just two years versus seven for a gift) until they qualify for full IHT relief is especially valuable when clients have left planning later than would be ideal as is so often the case. What’s more, the access and control afforded can also bring peace of mind – for instance, where long-term care provision may be a consideration. LAURENCE CALLCUT, PARTNER AND HEAD OF SALES, DOWNING BR qualification of relevant asset The relevant asset is BR qualifying as it has been held for at least 2 of the last 5 years and it was held by the deceased on death. 51 ESTATE PLANNING OPTIONS