Octopus sat down with Mark Greenwood, Director of Compliance Services at SimplyBiz, to discuss recommending inheritance tax-efficient investments.
If you’re new to the world of investments that qualify for Business Relief (BR), what are some practical steps you can take to help you write this kind of business?
We spoke to Mark Greenwood, Director of Compliance Services at The SimplyBiz Group, the largest provider of compliance support for financial services in the UK.
We asked him for his top tips for approaching this area of advice.
“I would think in most advisers’ client banks there will be clients where tax-efficient investments like BR are quite likely to be appropriate.”
Mark Greenwood
So what is BR?
BR-qualifying investments encourage individuals to invest in unlisted trading companies or those listed on the Alternative Investment Market (AIM). These are higher-risk investments than main-market equities. To compensate for some of that risk, the estate of an investor can claim 100% relief from inheritance tax on the value of the investment, as long as shares had been held for at least two years when the investor died. As this is simply an investment, unlike other forms of estate planning there is no need to give away wealth while alive. The qualifying shares are held by the investor until they die meaning they retain control of their wealth, and should they need to sell some or all of their investment to access their capital, they can do so, subject to liquidity.
Making a qualifying investment can be effective more quickly than traditional estate planning options, such as lifetime gifts, which can take seven years to reduce the value of an estate. Being able to make investments that support trading businesses and that provide relief from inheritance tax has made BR-qualifying investments a compelling option for many clients planning their estate.
Despite the growing popularity of BR-qualifying investments, it can be perceived as a daunting area to get to grips with. So here are some helpful pointers from Mark.
1. Get to know Business Relief
“Knowledge is everything,” says Mark. “For some advisers, if they’re not familiar with Business Relief there can be a fear factor.”
“Once they get to understand the investments, that fear dissolves.
“Not having the knowledge is not an excuse. For the right client, BR should be being discussed.
“I would think in most advisers’ client banks there will be clients where tax-efficient investments like BR are quite likely to be appropriate.
“BR isn’t for every client. But advisers should be looking at it, even if it’s to discount it for a client. It’s far better to have the knowledge, look at BR, and decide that actually for this client it’s not the way to go.”
I would think in most advisers’ client banks there will be clients where tax-efficient investments like BR are quite likely to be appropriate.
For the right client, BR can be incredibly valuable. Most clients want to leave as much as possible to their loved ones, but many don’t want to give away all their assets in their lifetime. If you’ve got a client who’s not keen to give away large sums of money during their lifetime to reduce their IHT liability, investing in a BR-qualifying investment is an IHT strategy to consider.
These investments do not use the Nil Rate Band (NRB), which means the client can plan to use their NRB to reduce an inheritance tax charge on less liquid assets, for example their home.
It’s quite a variety of clients that could benefit. You’ve obviously got clients that want their wealth to become exempt from inheritance tax quickly. Unlike gifts and trusts, which generally take seven years before they are fully exempt, BR requires just two years at the time of death.
Clients who have a Power of Attorney in place could benefit. As could clients with large ISA portfolios.
We do also see business owners using the proceeds from selling their business to invest in a BR-qualifying investment.
If a client owns their own business and the activities meet the qualifying criteria for BR, they should be able to invest the proceeds into another BR-qualifying investment and benefit from immediate relief from inheritance tax.
2. Adopt a goal-based risk approach
“There are a few areas that are consistently fed back on by the SimplyBiz file review team,” says Mark.
“Unsurprisingly risk is up there.
The tax benefits of BR are compensating for some of the risks. But it’s not always clear in the client file that the client has an understanding of the risks.
There’s a bit of an obsession around the tax benefits – which are fantastic – but our file review team would be looking to see that the adviser has addressed attitude to risk, capacity for loss, and how that impacts the recommendation within the case.”
It’s worth recapping the risks here.
The value of a BR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies maintaining their qualifying status.
The shares of unquoted companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
Approaching risk can be particularly challenging where a client has a relatively low appetite for risk overall but is perhaps suitable for BR. Yet advisers should not necessarily be deterred.
Mark says, “You’ve got two factors here. What proportion of a client’s assets are being recommended to go into a BR investment? That’s a factor. Then there’s having a goal-based risk approach.
A client can have different tranches of money at different ‘speeds’ from a risk perspective. And the file needs to clearly articulate that.
The FCA picked up on this in their first assessing suitability report in 2016,” says Mark. “The FCA noticed there was a pattern in some cases where it wasn’t clear from the file whether the attitude to risk and the capacity for loss was for a particular tranche of money or for the client’s overall assets.
If a client is a 6/10 for risk overall, and you have a solution that’s 9/10, if there’s no narrative around that then you’re looking at the case and saying that doesn’t seem to fit.”
3. Be thorough when documenting suitability
“It needs that extra level of documentation,” concludes Mark. “Make it clear that for this particular tranche of money, for these reasons, a client is going to be taking more risk than the rest of their portfolio.”
“With BR cases, you’ll want to have an accurate inheritance tax calculation on file too. And an ‘after inheritance tax’ calculation to demonstrate the impact of the advice.”
“It needs that extra level of documentation,” concludes Mark. “Make it clear that for this particular tranche of money, for these reasons, a client is going to be taking more risk than the rest of their portfolio.”
“With BR cases, you’ll want to have an accurate inheritance tax calculation on file too. And an ‘after inheritance tax’ calculation to demonstrate the impact of the advice.
An area that sometimes gets ignored is the Residence Nil Rate Band. The eligibility for the RNRB and the application of it is not always well documented in client files.”
Learn more about Business Relief
Watch the Estate Planning Show for more practical support and information on recommending investments that qualify for Business Relief.
We also have an animated video that explains BR, which you can share with your clients.
Click here to watch it.
