“I wish I had started making pension contributions sooner”, or “I’ve been meaning to write a will for some time”. These are comments we often hear from prospective clients.
A more familiar phrase in recent times is, “Have I left it too late for inheritance tax planning?” We appreciate inheritance tax (IHT) is not something people get excited about discussing, but for some, it’s absolutely important they do. For those who leave it to later life, their options reduce substantially and will likely be more favourable to the Chancellor than their beneficiaries.
If you are well organised, you could consider several solutions such as gifting of assets, life cover or trust planning. However, if left too late, the seven-year rule can make gifting less attractive and the ability to obtain cover at a competitive premium is reduced. You could consider trust planning, which has the same gifting criteria to meet. However, becoming a trustee later in life can bring its own set of complications, something many would rather avoid at a time when simplicity is the key to managing your financial affairs.
So what else can you consider?
Business-relief qualifying investments
Unlike an Alternative Investment Market (AIM) portfolio, an alternative solution with a few providers allows investors to purchase shares via an unquoted trading company. This company then enters trading partnerships with several organisations, and it’s this trading entity that often qualifies for business relief (BR), once held for a minimum of two years. As a reminder, once qualified business relief can offer up to full IHT relief, therefore an effective tax rate of 0% (rather than 40%), but the asset remains part of the investor’s estate. As such, this provides the individual with control throughout the ownership period. Once held for two years, the intention is for the asset to be BR-qualifying within the estate, therefore benefiting from the 0% tax rate applicable to that asset on death.
When considering the risk perspective, it’s important to understand your objectives. While many of us want to try to mitigate any IHT liability, importantly we also don’t want to lose money – both capital loss and by way of inflation. If you are older, you may not be considering a particularly long-term investment horizon, and therefore this needs to be accounted for when assessing a risk profile and making a recommendation. In most cases, the aim is to retain value in line with inflation, from a cautious risk profile, but of course everyone has their own objectives.
An attractive investment for the older generation is to use one of the estate planning portfolios that are available in the marketplace. Typically, the solutions selected will have large weightings towards asset-backed investments such as infrastructure and energy projects, which typically are deemed lower risk than a comparative BR-qualifying investment, such as a portfolio of AIM stocks, which are more volatile in nature.
These products aim to be BR-qualifying, although investors are still subject to the two-year qualifying period attached with these investments, which could still be a concern for some. However, if passed to a spouse upon death, the two-year clock does not restart, then, providing the asset is held for a total of two years between both spouses, it will achieve IHT relief on second death.
A further benefit available in some of the BR-qualifying portfolios is the ability for investors to access a group life policy. While there are criteria that need to be met, it is likely to be much less stringent than if we were to try to arrange individual cover for someone in their 80s, as the provider can spread the risk across the group life policy, rather than the single insured member. It should be added that individuals will need to declare that they’re not terminally ill, however, there may be no underwriting required, which makes the application process extremely simple.
As such, the big benefit is that the investment solution can provide immediate peace of mind, as the life cover policy would provide an amount equivalent to the initial IHT liability amount, if death was to occur before the two-year qualifying period has ended. This means the total value of the investment can be passed to the beneficiaries. This can be a great option for some of those older clients who want to improve their IHT position but are running out of time.
Sounds too good to be true? Perhaps!
There have been several proposals to change IHT legislation following the recent Autumn 2024 Budget, which are due to come into effect over the next few years, including limitations to BR and agricultural property relief. This includes a £1 million allowance per individual for full IHT relief, and 50% IHT relief (i.e. an effective rate of 20% IHT) thereafter from April 2026.
Although the current unlimited BR investment allowance at 0% for IHT is likely to have thresholds, BR planning still holds a valuable place in IHT planning for many, even under the new proposed rules. For example, ignoring all other nil rate bands and exemptions:
On death after 6 April 2026, a £2 million investment into a BR portfolio would result in the first £1 million pounds at 0% IHT and the second £1 million pounds at 20% IHT, giving the potential IHT liability of the £2 million pounds at an overall rate of 10% (£200,000), which is significantly better than 40% (£800,000). These figures are for illustrative purposes only and should not be treated as advice. In addition, it should be noted that the proposed IHT changes are currently under technical consultation.
This article was written by Wealth Management Consultant, Anthony Rowe.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. Tax treatment of investments and income depends on an individual’s circumstances and may be subject to change in future. The content of this article is for information only and does not constitute advice.
All content correct at time of writing (December 2024).
