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22 May 23

How Business Relief puts estate planning control back into the hands of later life clients

How Business Relief puts estate planning control back into the hands of later life clients

When it comes to estate planning strategies, one size does not fit all. If you have clients who are not comfortable with gifting money away in their lifetime or settling assets into trust, it’s worth suggesting an investment solution that ensures they retain access and control over their wealth.

Inheritance tax liabilities continue to be a concern for an increasing number of UK citizens. Not only has the inheritance tax threshold been frozen for well over a decade, but as things stand it isn’t due to be reviewed until 2026 at the earliest. For now though, it’s no wonder that more people are being caught in the inheritance tax trap.

But inheritance tax isn’t the only worry facing clients, as the increasing cost of later life care is also a serious concern. Right now, anyone with savings or assets worth more than £23,250 can expect to pay for their own care costs. Although this threshold is expected to increase to £100,000 in October this year, new research from UK Care Guide suggests the average annual cost of a self-funded care home stay now stands at £45,897, or £882 per week, with the cost of care homes in cities around the UK rising by an average of 11% in 2023.[1]

And for those who need to be placed in a nursing home – receiving round-the-clock care – the costs are even greater. Average UK nursing home costs are around £56,056 annually, which works out at £1,078 a week.[2] So it's wholly understandable clients are keen to maintain access to their wealth to ensure they can meet those costs if they need to one day. But this presents clients with inheritance tax liabilities with an estate planning dilemma. Traditionally, the most widely-used strategies to minimise an inheritance tax bill before death have been to simply give the money away in their lifetime, or where larger sums are involved, settle assets into trust. However, both have their drawbacks.

Take gifting, for example. Clients can always simply give money away in their lifetime to reduce the value of their taxable estate. But while HMRC gives everyone an annual gifting allowance of £3,000 every year, making gifts of larger amounts does run the risk of incurring an inheritance tax bill. The seven-year rule on potentially exempt transfers means the gift only fully falls outside of the client’s taxable estate if the client lives for at least seven years after the gift is made. And if the client dies within the first three years of the gift being made, then depending on the size of the gift in relation to the client’s available nil-rate band, it could still be liable to the full 40% inheritance tax charge.

More importantly though, once the gift has been made it’s no longer the client’s money. They’ve lost control over that portion of their wealth, and may not be able to get it back.

And what about settling assets into trust? If your clients are uncomfortable with the idea of giving away large sums of money during their lifetime, a trust is a good way to plan for their estate – and for inheritance tax – without losing control over those assets. But as with gifting, assets settled into a trust take seven years before becoming fully exempt from inheritance tax. If the client died before the seven-year mark, those assets would again form part of their taxable estate.

Also, since 2006, inheritance tax charges are taken from trusts at three specific points: when the trust is first set up, at ten-year intervals, and when assets are transferred out of the trust and given to beneficiaries. All of these charges erode the value of assets in the trust, making trusts less attractive from an estate planning perspective.

So is there a better option for clients who want to retain access and control over their assets during their lifetime? The simple answer is yes, thanks to Business Relief. Established almost 50 years ago, Business Relief is a valuable tax relief that encourages investment into trading businesses. Once the shares of a Business Relief-qualifying company have been held for at least two years, they are considered by HMRC to be outside of the shareholder’s taxable estate. After the death of the shareholder the shares are passed to beneficiaries free from inheritance tax.

It’s important to note that clients don’t need to be a business owner to benefit from Business Relief. They can appoint an experienced investment manager to invest on their behalf, building a diverse portfolio of companies expected to qualify for Business Relief. Because it is an investment, the shares belong to the client. They can choose to sell some or all of the investment should they need to (although any money withdrawn will no longer be exempt from inheritance tax).

Also, in the case of a married couple or civil partnership, should the client die before owning the investment for the two-year minimum, the shares can be transferred to the surviving spouse without losing the tax benefit or resetting the two-year timeframe.

Of course, all investments carry an element of risk, and investing in Business Relief-qualifying companies is no exception. But with more clients keen to stay in control of their financial future in later life, Business Relief is an excellent way to carry out estate planning without them feeling anxious about losing access to their wealth during their lifetime.

Straightforward solutions from Triple Point

At Triple Point, we see Business Relief playing a critical role in estate planning conversations, particularly among clients with larger inheritance tax liabilities. We offer a range of estate planning support for advisers, including CPD-accredited tax planning webinars and tools to make life easier to discussing estate planning with your clients.

Contact your local Triple Point Business Development Manager for more information. Tax treatment depends on individual circumstances and may be subject to change.