Tell your clients it’s not too late to start estate planning

For professional advisers only. Not to be relied upon by retail investors.

Do some of your clients think they’ve left it too late to reduce the amount of inheritance tax likely to be due on their estate? Perhaps they’ve read about traditional estate planning options, such as gifts and trusts, which take seven years before offering full inheritance tax exemption. For clients in later life, or in ill health, seven years can be too long to wait.

But ignoring the need for estate planning could prove costly. According to HMRC, annual inheritance tax receipts topped £5 billion for the first time in 2017, and the number of estates facing an inheritance tax bill has increased to well over 40,000.

So, if you have clients likely to leave behind an inheritance tax liability, and who are comfortable with the higher risks of investing in unquoted companies, you can add value by discussing an estate planning solution they may not have heard about. One that targets full inheritance tax exemption after just two years, instead of seven.

The Octopus Inheritance Tax Service invests in companies that qualify for Business Property Relief (BPR). BPR-qualifying investments have become an increasingly popular approach to estate planning, particularly among clients with large estates and a significant holding of securities and cash that could trigger a large inheritance tax bill. Shares held in a BPR-qualifying portfolio become exempt from inheritance tax after being held for just two years, provided the shares are still held at the time of death.

However, it is worth reminding investors that BPR is a tax relief made available in recognition of the higher risk associated with investing in smaller and unquoted companies. Clients may not get back the full amount they invest, and the value of the investment may fall as well as rise during the time they hold it.

You should make clients aware that the value of tax reliefs will depend on a client’s individual circumstances. Tax reliefs depend on the portfolio companies maintaining their qualifying status.

Also note that HMRC makes its decision on whether beneficiaries can claim BPR only after the death of an investor. The Octopus Inheritance Tax Service takes into account current legislation, case law and HMRC practice. But we can’t guarantee tax rules won’t change in future.

Control is another plus

Another significant advantage of undertaking estate planning through making BPR-qualifying investments is that it offers clients a way to keep control over their wealth. One of the biggest compromises that comes with making lifetime gifts to reduce inheritance tax liabilities is that the giver must lose control over the assets. But because the Octopus Inheritance Tax Service is an investment, the client retains ownership of their assets. This means that they could choose to sell the shares if they need to. This is subject to liquidity being available. An important point about the unquoted companies we invest in is their shares can be harder to sell than shares listed on the main market of the London Stock Exchange. They could also fall or rise in value by more than main market-listed shares.

The Octopus Inheritance Tax Service has liquidity squarely in mind. However, if there are unusually large withdrawals, it could take several weeks for clients to receive funds, or longer in exceptional circumstances (such as a change in tax rules).

A decade of delivery

Since the Octopus Inheritance Tax Service launched over ten years ago, more than 1,000 estates have been entitled to claim BPR in respect of their investment, without a known challenge from HMRC. This means you can offer your clients a BPR-qualifying portfolio that has been tried and tested over a decade. And for many of them, the two-year period it takes for BPR-qualifying shares to become exempt from inheritance tax could feel much more achievable.

Remember, qualification for BPR is assessed when a claim is made – for example when a shareholder dies – on a case-by-case basis. We therefore cannot guarantee that our portfolio companies will always qualify, but we take every care to ensure they do, including conducting a regular review by a leading accountancy firm.

To help your clients get more comfortable with estate planning, download our free ‘Untangling inheritance tax’ guide. It explains the various options open to clients interested in passing on more of their wealth.

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Personal opinions may change and should not be seen as advice or a recommendation. Estate planning products are not suitable for everyone. 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 recommend investors seek professional advice before deciding to invest. Investors should read the product brochure before deciding to invest. This is available at 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. Issued: November 2017. CAM06121.

Originally published: August 23, 2017 / Jessica Franks
Edited: November 27, 2017