Estate planning without losing control of assets and settling for low returns

3 years ago

A simple solution to inheritance tax mitigation

The well-trodden paths to estate planning such as giving wealth away or setting up trusts can mean clients losing control over their assets before they are ready. The cost of some solutions eats away at capital, and others combine IHT exemption with very low investment returns, putting a real cost on longevity.

There is an alternative approach which is refreshingly simple and delivers IHT exemption in only two years, or even immediately in some cases. BPR-qualifying lending companies offer a low cost route to IHT exemption, with above inflation investment returns and no loss of control. The in-built flexibility means there are plenty of opportunities for advisers to tailor IHT planning to individual client requirements.

Business Property Relief

BPR, as it is known, exempts the whole value of shares held in any qualifying private limited company from inheritance tax. The main qualifying criterion is that the company must be mainly engaged in trading activities, as opposed to making or holding investments.

Investing in AIM shares is a well-established route to BPR qualification, but doesn’t meet the needs of all clients. Some want to avoid exposure to volatile and illiquid equities, others may feel that AIM valuations are artificially buoyed up by IHT investors. Some clients already have an AIM BPR portfolio and are looking for something different to spread risk.

Lending as a trade for BPR

The client invests in shares in a company which trades as a lender. Lending companies don’t need staff or overheads and can be very simple to run. Clients can outsource the set up and administration process as well as the whole lending process to Rockpool, or do it themselves if preferred.

The BPR qualifying period starts as soon as the client holds shares in the company. Cash can then be lent to borrowers over time, with interest receipts and loan repayments replenishing the company’s cash and funding new loans in a continuous cycle. This cycle doesn’t affect BPR qualification.

Identifying the right clients

Many successful clients’ own companies that hold too much cash or investments to qualify for BPR. By deploying some of these funds into lending, the company becomes qualifying. What was an investment company becomes a trading company, opening the way to inheritance tax exemption on the whole value of the company.

Clients who don’t already own a company can benefit too, swapping high personal tax rates for the UK’s low and falling corporation tax rate, with the prospect of zero CGT and zero IHT on the accumulated value when the time comes to hand on to the next generation.

Some sample  cases 

Jane’s wealth is mostly in a portfolio of traditional assets – shares, bonds and funds. She wishes less of her wealth would be lost in IHT, but it’s too early to pass on to the children.

Jane’s adviser suggests re-allocating a third of the portfolio to a BPR solution based on lending. Now the potential IHT bill on Jane’s estate is much lower, but she still has full control over her wealth.

Rachel and Robert are selling their holiday home, which is worth far more than they paid. They want this wealth to work for them, but don’t like the idea of paying CGT.

Their adviser suggests combining BPR lending with an EIS portfolio. The gain on the house sale is invested in EIS shares, so the CGT liability stays locked away. The original cost of the house is invested in lending company shares, starting the 2-year clock to IHT exemption. And of course the EIS shares are also IHT exempt.

Roger set up a family investment company a few years ago as a vehicle for generational planning. He wants a simpler way to mitigate IHT.

Roger’s adviser suggests re-balancing the company’s activities towards the trade of lending and away from investment. That way the whole value of the shares falls outside the IHT net. Roger now has more flexibility to decide when he passes wealth to the next generation.

Stephen built up a successful business in his company and recently sold it, leaving cash in the company. He always relied on BPR to save IHT, but the company is no longer qualifying.

Stephen’s adviser explains that BPR qualification can be re-established immediately. The company approves a lending strategy designed to deploy at least half of the cash to a lending strategy, with loans to be made over time. Stephen didn’t incur the income tax bill that would have been due if he had withdrawn cash to put into traditional IHT mitigation solutions.

IHT mitigation for younger clients

In the past, fewer clients under 70 years old chose inheritance tax solutions. That made sense because the investment returns were depressed by high charges and there was too much focus on the tax saving. The approach to IHT planning using lending changes the picture. A diverse book of loans within a BPR qualifying lending company can deliver after tax annual returns of 5% or more and with very low charges. The 40% IHT saving is still a key part of the planning, but the higher returns make this approach attractive over a longer term. Investors aged 55 are more attracted to mitigating IHT when the underlying returns justify investment on their own.

For further information please email team@rockpool.uk.com or contact us on 0203 8548 100.