Meet Carol, who wants to retain access to her capital
Watch this video scenario
Estate planning for clients who want to retain access to capital
Some clients are reluctant to move forward with their estate planning because they feel uncomfortable giving away assets, even if they can afford to do so.
Business Relief (BR) offers a way for clients to plan for inheritance tax while keeping assets in their own name.
Remember, BR won’t be right for everyone. It puts investor capital at risk and comes with other considerations. We cover the risks in more detail in this scenario.
About this planning scenario
This is a tax-planning scenario designed to help you build appropriate strategies for your clients.
Nothing here should be viewed as advice. Any suitability decisions should be based on a client’s objectives and needs, as well as their attitude and capacity for risk.
Advisers should consider the value of tax reliefs for a client and the impact of charges relevant to the product represented or any product chosen.
Meet Carol, who doesn't want to lose access to her capital
Her adviser explains that she can afford to give away some of her assets. But Carol has been in control of her wealth all her life and is reluctant to make gifts or use trusts.
Carol worries that if her health deteriorated, she might want to use the money to pay for her care. And in seven years she’ll be 93. She’s worried that if she passes away before then, she will still leave her beneficiaries with an inheritance tax bill, even if she gives away assets immediately.
A tax-planning solution
The adviser assesses Carol’s needs and objectives, appetite for risk and capacity to bear losses and deems her suitable for an investment that qualifies from Business Relief. If BR-qualifying investments are held for two years and at the time of death, they should be able to be left to beneficiaries free from inheritance tax.
BR-qualifying portfolios invest in the shares of one or more unquoted or AIM-listed companies. They are higher risk investments than Carol’s portfolio of main-market listed equities, and the tax relief is designed to provide some compensation to investors for taking additional risk.
Carol inherited a large investment portfolio from her late husband. So her adviser suggests selling £250,000 of this portfolio and reinvesting the proceeds in BR-qualifying shares.
While Carol is not expected to need to access this pot of money during her life, the investment will remain in her name, and so she can request a withdrawal should she need to. Her adviser makes it clear, however, that withdrawals cannot be guaranteed.
Carol’s adviser explains the risks
Carol’s adviser makes it clear to her that the value of a BR-qualifying investment, and any income from it, can fall as well as rise. She may not get back the full amount she invests.
He also explains that BR is assessed by HMRC on a case-by-case basis, and that this assessment happens when an estate makes a claim. The ability to claim the relief will depend on the company or companies Carol invests in qualifying for BR at the time the claim is made.
Tax treatment will also depend on personal circumstances, and tax legislation could change in future.
Her adviser explains that the shares of unlisted and AIM-listed companies can be harder to sell than shares listed on the main market of the London Stock Exchange. Their share price may also be more volatile.
Get in touch with your local IHT expert to discuss this scenario
How it works in practice
Let’s see how it might look if Carol were to invest in the Octopus Inheritance Tax Service,
a service that invests in the shares of one or more unquoted companies expected to qualify for Business Relief.
Please note
- This example is for illustrative purposes only and each investor’s own tax situation may be different.
- For ease of comparison, we’ve assumed identical charging structures, an annual growth rate of 4.2%, and that annual management charges are calculated annually.
- The risk profile of each portfolio, charging structure, and any growth or losses is likely to differ.
- This example does not include any charges paid for financial advice.
- The Octopus Inheritance Tax Service has an initial charge of 2%, a deferred AMC of up to 1% + VAT and a dealing fee of 1%. AMC is calculated daily.
- This example assumes that the investments will be held until death and the nil-rate band is offset against other assets.