A New Way to Avoid Inheritance Tax

With the freeze on the Nil Rate Band until 2015, Inheritance Tax (IHT) is back on the agenda for many people. If you have heard of Business Property Relief (BPR) but do not own a business you would be forgiven for assuming it wasn't something you could use. In fact BPR can be used to mitigate IHT by people that do not own a business.

BPR was introduced by the Treasury to enable business owners to pass on their family firms without paying IHT on any assets held for a minimum of two years. However, investors in assets such as portfolios of Alternative Investment Market (AIM) stocks and the Enterprise Investment Scheme (EIS) can also qualify for BPR.

Q: How much risk is involved in BPR assets?
A: Investing in AIM shares typically involves more risk than investing in quoted shares. BPR qualifying companies have been created that use less risky business trades that are backed by insurance and which focus on preserving your capital rather than growing it, which can make them less volatile than other AIM businesses, but they are still considered to be high risk.

Q: I thought ISAs the most tax efficient investment?
Once you have moved from accumulating assets to protecting them it may be worth moving your ISAs to BPR investments to avoid IHT. The reason for this is that whilst ISAs are free of Income Tax and Capital Gains Tax they are not free of IHT. However, tax is not the only consideration and you should also consider the potential differences in liquidity and risk.

Q: What happens if my spouse dies before the 2 year qualifying period ends?
A: Passing BPR investments from one spouse to another does not restart the two year clock, so if a husband owned them for a year and died and left them to his wife, and she died a year later, the assets would still be IHT exempt as long as they remain in BPR qualifying assets.

Q: I am in poor health or in my nineties. Will underwriting will be a problem?
A: There is no underwriting required so it can be used regardless of your age or health situation.

Q: Is it too late if I have already sold my business?
A: To qualify for BPR you must have owned qualifying assets for 2 years in the last 5 years and own them at your death, but the assets do not have to be the same as long as they all qualified. So if you sold a business or AIM shares 2 years ago which you had owned for 2 years, you can place the proceeds in another BPR asset now, and they will be IHT exempt immediately.

Q: Can I avoid Capital Gains Tax (CGT) as well as IHT?
A: If you have paid CGT on the sale of a business or other asset within the last 3 years, the proceeds can be reinvested into EIS assets so the CGT can be reclaimed and not paid until the EIS is sold. This means if the EIS is held until death, the CGT will never have to be paid as the liability dies with you. EIS investments can also benefit from 2 year BPR IHT exemption.

Q: Can a Power of Attorney (POA) use BPR?
A: BPR investments have to be held in the owner's name, so there is no relinquishing of assets which makes them suitable for POAs.

Q: Can BPR help reduce the IHT payable on my home?
A: If you have capital tied up in your home above the Nil Rate Band value, you can use an equity release mortgage to release cash to invest in a BPR asset. However this could have significant downsides if the value of your BPR investment was to fall compared with your outstanding debt.

Q: What if I have previously invested in a trust to reduce my IHT?
A: If you have invested in a loan trust within the last 10 years it is possible that you will have had little or no investment growth and therefore little or no IHT saving. One option you have is to cancel the loan trust and invest the proceeds into BPR assets.

Q: What pitfalls should I watch out for?
A: AIM shares are not generally as liquid as large company shares so you may not be able to realise your investment as quickly as you would with a mainstream investment. The schemes that focus on capital preservation tend to invest in one company and as such do not provide diversification between different shares which makes them high risk compared with a diversified portfolio of shares.

Summary

Whilst BPR assets do potentially involve high level of risk and less liquidity than mainstream investments; to some extent they do have the potential to allow you to have your cake and eat it by saving IHT whilst at the same time giving you access to your money and doing so without the usual risk level of AIM shares. They are certainly worth a closer investigation.