Introducing Triple Point’s Sustainability Bluebook: 2023 Report
12 January 24
12 January 24
Investments that qualify for Business Relief can address a range of different challenges that your clients might be facing. Here are five of the most common estate planning scenarios where these kinds of investment could be the solution your clients are looking for.
The need for estate planning can become more pressing in situations where a client is at an advanced age or has received a medical prognosis that means their time to plan ahead is short. In these cases, traditional methods of estate planning such as gifting and trusts – which take seven years before achieving full exemption from inheritance tax (IHT) – may have only limited use or can be ruled out altogether.
But with an investment that qualifies for Business Relief, the shares held by the client become exempt from IHT after they have been held for just two years (if still held upon their death). For many clients, this could well prove to be a much more achievable timeframe compared to the seven-year wait required for gifts and trusts.
One of the reasons why some clients struggle with estate planning needs is because they are worried about losing control over their wealth, or simply don’t want to end up in a situation where they regret having given away their assets. In these scenarios, an investment that qualifies for Business Relief could help solve both access and control issues at once.
Because the investment is held in the client’s name, they retain complete control of it throughout their lifetime. The money is theirs to do with as they wish, without signing it over to beneficiaries or giving it away. And they will still be able to access the capital, subject to liquidity, should their circumstances change – for example, if they find themselves facing unexpected care costs.
In cases where a client has a Power of Attorney in place, estate planning can be difficult. Traditional strategies, such as gifting or settling assets into trust, will typically require approval from the Court of Protection. Even in cases where the Court of Protection does approve these requests, which can be a lengthy and expensive process in itself, it still takes a full seven years before those assets are fully outside of the client’s taxable estate.
As with any decision an Attorney makes, it should always be in the best interests of the Donor and something the Donor would have done. An Attorney can make investments that qualify for Business Relief on behalf of the Donor without having to apply to the Court of Protection for permission. Because investments are held in the client’s name, those assets haven’t been given away and are available to be withdrawn throughout the client’s lifetime. And should the client need income in the future, their Attorney can arrange a sale of the shares (although shares sold will no longer qualify for Business Relief).
Business owners can sometimes be caught out when the time comes to sell their business, as the proceeds of the sale are part of their taxable estate. Even where the owner’s business qualified for Business Relief, that relief will have been lost following the sale.
If the business qualified for Business Relief at the time it was sold and if the proceeds are reinvested into other companies that qualify for Business Relief within three years of the sale, the proceeds qualify for ‘Replacement Property Relief’. Once invested, the proceeds immediately become exempt from inheritance tax again, providing the total period of qualifying investments is at least two years out of the last five years and on death.
A common estate planning strategy is to settle assets into a discretionary trust. While this allows the settlor to have control, they can be expensive and can take seven years to
become exempt from inheritance tax. Any assets settled into a discretionary trust will also use up the Nil Rate Band, and where the amount is over £325,000 there is a 20% Chargeable Lifetime Transfer. Furthermore, the trust only becomes exempt from IHT after seven years and may also be subject to periodic charges.
However, an investment that qualifies for Business Relief can be settled into a discretionary trust provided the shares have been held for the minimum two-year period. There’s no Chargeable Lifetime Transfer charge on entry, and as long as the shares are held within the trust there’s no further inheritance tax charge to pay, even if the client dies within the first seven years of it being created.
Using estate planning scenarios with your client bank
As these scenarios confirm, Business Relief can be suitable for clients facing a range of estate planning issues. To discuss these scenarios in greater detail, visit our dedicated online estate planning page at tpeps.triplepoint.co.uk.
For professional financial advisers only. The investments discussed in this article are not suitable for all investors. Tax treatment depends on the individual circumstances of the investor and is subject to change. Tax reliefs depend on the investee companies maintaining their qualifying status. This article has been issued by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority under firm reference number 618187.