One side-effect of rising asset prices has been an increase in the size of inheritance tax bills. Last year, HMRC reported annual inheritance tax receipts of over £5 billion for the first time. The Treasury expects this to rise to more than £6 billion over the next five years.
Small wonder, then, that estate planning is a growing market for advisers. At Octopus we’re seeing increased interest in investments that qualify for Business Property Relief (BPR). These are investments that become inheritance tax free after just two years, while also letting clients retain access to their capital in case they need it in future.
The attractions of BPR are clear. It’s likely that investors considering this kind of strategy will want your help deciding if it’s appropriate for them, as well as help with selecting the right investment.
This article focuses on four useful questions that you can ask any BPR provider, to help you get to the right outcome for your client. The first two are questions that you would naturally ask about any kind of investment. The third and fourth relate specifically to BPR-qualifying investments.
You should remember that BPR-qualifying investments put capital at risk, and clients may not get back the full amount they put in.
Questions to ask:
- What’s the financial strength of the provider?
- How much experience does the management team have of this kind of investment?
- What is their track record of successful BPR claims?
- What experience does the manager have of providing liquidity?
Let’s explore the four questions above in more detail.
1. What’s the financial strength of the provider?
Understandably, clients tend to feel more confident if their money is with a provider that’s financially sound. By looking at this as part of your due diligence, you can give your client added peace of mind.
To help you, Octopus Investments recently sought an independent financial strength assessment from AKG, a firm that specialises in assessing and rating financial services providers. AKG awarded Octopus Investments ‘Strong’ in its ratings scale.
We can provide advisers with a copy of this report to use as part of your due diligence. To request a copy, call us on 0800 316 2067.
2. How much experience does the management team have?
Clients will want a team with a solid track record of delivering on its mandate, whether that’s to target significant capital growth or to grow capital at a steadier, more measured rate with fewer ups and downs. That likely means a good-sized fund management team whose members have many years’ experience of what they’re investing in, and who are focused single-mindedly on their sector.
At Octopus we have more than 125 investment managers working in teams of sector-focused experts. Our dedicated in-house smaller companies team and unquoted investment teams have been managing BPR-qualifying investments since 2005, and now have £3 billion in funds under management. Our teams are experts in their sectors, whether that’s energy, property, healthcare or smaller company investing.
3. What is the track record of successful BPR claims?
Investors in BPR-qualifying shares are incentivised to take extra risk with their money by the benefit of being able to pass on their investment free from inheritance tax when they die. Before recommending an investment, you need to be confident that that it will qualify and achieve their planning objectives. That means a crucial question to ask about any company or portfolio you are considering recommending will be: ‘Does the investment manager have expertise of picking companies that qualify for BPR?’.
No one can guarantee that a company will qualify, because HMRC has to assess each BPR claim on a case-by-case basis when an investor dies. That means that any company your client invests in needs to qualify for BPR every day in the future, as well as today. What gives us confidence is the fact that more than 3,000 customers have held their Octopus inheritance tax investment for more than two years before they passed away and, to the best of our knowledge, all of these investments have qualified for BPR. However, we don’t take this for granted. Our in-house sector specialists monitor portfolio companies to make sure they continue to qualify. On top of that, we also engage a leading accountancy firm to undertake regular analysis for us, so we can get a second opinion.
Clients should understand that the value of inheritance tax relief will depend on their personal tax situation, and that tax legislation could change in future.
4. What experience does the manager have of providing liquidity?
For many investments, liquidity isn’t a big concern. But for investments that qualify for BPR, it’s worth thinking about. That’s because companies that qualify for BPR will always be either unlisted – meaning their shares don’t trade on any stock exchange – or their shares will be listed on the Alternative Investment Market (AIM). It may not always be possible to sell unlisted or AIM-listed shares straight away, so you want to be sure the manager has considered this and has designed their investments with liquidity in mind.
One of the benefits of considering making BPR-qualifying investments as part of a client’s plans for their estate is that their wealth stays in the client’s name. That means the client retains access to their capital during their lifetime, should they need it. Therefore, for some clients, access to liquidity if they need it will be important. They’ll want to know what the process is for accessing their money and what track record the provider has for returning funds to investors who ask for them.
For more information about accessing their money, clients can view our new video on what to expect when investing in an Octopus inheritance tax product here.
Over the last three years, we’ve provided more than £500 million of liquidity to investors in our flagship Octopus Inheritance Tax Service. Although this service invests in unquoted shares, we can usually sell shares within ten days. For investors in the Octopus AIM Inheritance Tax Service, we can usually sell shares within a week. In some instances though, it could take significantly longer to liquidate positions in both of these products. Be sure to ask providers about how they address the issue of liquidity.
Investors should also keep in mind that AIM-listed and unquoted shares can fall or rise in value more than shares listed on the main market of the London Stock Exchange.
Getting it right for every client
By asking the four questions above, you’ll be able to give each client a clear explanation of exactly why you’re recommending your chosen BPR-qualifying investment.
If you have any questions for us about Octopus inheritance tax investments, please give us a call on 0800 316 2067.More about estate planning and BPR
Jessica Franks, Inheritance Tax Business Line Manager
Personal opinions mentioned in this blog may change and should not be seen as advice or a recommendation. BPR-qualifying investments are not suitable for everyone and any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. We record telephone calls. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. M2-CAM06740-1803.