Most clients in retirement have a central objective of ‘never running out of money’. Business Relief gives a lot of flexibility in balancing future needs against immediate and efficient IHT planning. This is in comparison to the major and mostly irreversible decisions that need to be made when gifting or settlement into trusts are considered.
Factors that would make BR investments suitable
The most important aspect is ability to withstand loss. Any BR investment is naturally going to result in concentrated exposure to UK equities and those that could be relatively illiquid (if not using AIM) or certainly those that are less well capitalised and potentially more volatile (if using AIM).
In theory, investors in these products need to have a total capacity for loss, as the way of achieving full IHT relief is only realised by holding the shares until death. While the ability to access the funds if ever needed is a major planning consideration, the focus should be on never requiring access. Investors in BR products need to also be comfortable with the range of risks. They are in most instances likely to fall within two camps: those who only have experience of ‘traditional’ investments and those have never invested before.
While there are a number of products that focus really well on minimising volatility through capital preservation, investors need to be aware of the potential impact market downturns might have on their portfolio. Understanding the additional risks and potential implications is crucial to supporting a BR recommendation.
Before you can consider a suitable BR product, you should establish with the client their attitudes and feelings towards:
- Objective of the investment: Is capital preservation key or is a growth strategy with potential for income distributions more appropriate
- Their emotional and practical capacity for loss as well as the impact of volatility: an asset backed unlisted approach is likely to be less volatile compared to a portfolio of AIM holdings
- Anticipated timeframe: this will largely depend on age and if the period is shorter, an asset backed approach with a more defined exit strategy might be more suitable. Likewise, a longer-term horizon could lend more weight to use of AIM assets
- Their knowledge and experience: knowledge of the AIM might make this a more suitable approach.
The potential size of the portfolio will have an impact.
We’ve seen a number of wealthy clients make use of a reducing investment threshold by ‘dipping their toe in’ with relatively small approaches to BR investment Establishing the above allows you to narrow down your filters. You can then consider the potential providers based on a comparison of key features including, but not limited to, track record, provider experience, charges and transparency and investment approach and mandate.
Investment in BR has increased over recent years. We would expect this trend to continue particularly as spending on care becomes more of a mainstream planning consideration for individuals. For those
for whom BR investment is judged as suitable, the benefit of maintaining lifetime ownership and access for purposes of future care funding is likely to make this one of the main IHT planning strategies individuals, and their advisers, consider.
This piece has been written by Grant Callaghan, Head of Paraplanning at Para-Sols as part of the Business Relief Report 2019. For the full report go to https://intelligent-partnership.com/br-industry-report-2019/