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How John helped Cliff kickstart his estate planning

12 May 2020

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

Another client scenario for you to get your teeth into this week. 

John has been Cliff’s financial adviser for 27 years. For most of that time, Cliff ran his own business. Cliff is a widower, so was reluctant to retire, but just over a year ago, he finally decided to sell the business. In the event, he received just shy of £4 million. 

Cliff wanted to invest some of the proceeds to generate a retirement income, which John helped him do soon after the sale of the business went through. 

John also made Cliff aware that the sale of the business had left Cliff with a substantial inheritance tax liability. Without planning, this would reduce the amount his son Andrew and daughter Nicole would receive from Cliff’s estate when he dies. 

Cliff agreed that this is something he would need to plan for. But at the time, he was focused on generating an income, and wanted to get that done before taking some time to travel. So he left the estate planning for another day.

A year down the line, and unfortunately Cliff has developed some health issues. At his next review, John cautions him that traditional forms of estate planning, such as making gifts, can take seven years to become fully free from inheritance tax.

However, Cliff does have another option.

John has some good news for Cliff

Had Cliff passed away when he still owned his company, his shares in the business would have been expected to qualify for Business Property Relief (BPR), a long-standing relief from inheritance tax. This would have meant he could have left those shares to Andrew and Nicole free from inheritance tax.

Typically, a new investment into BPR-qualifying shares must be held for two years before it is zero-rated for inheritance tax. However, John has some good news for Cliff.

John explains to Cliff that there’s a three-year window following the sale of a business that qualified for BPR. During that period, if Cliff uses some or all of the proceeds from the sale of his business to purchase another BPR-qualifying business, that new investment should immediately qualify for BPR. The same is true if Cliff invests the proceeds in the shares of a BPR-qualifying business managed by someone else, or in a BPR-qualifying investment portfolio.

This comes as a huge relief to Cliff, who had been kicking himself for not starting his estate planning sooner. Based on Cliff’s objectives and attitude to risk, John recommends investing £1.8 million into a BPR-qualifying portfolio managed by a specialist manager. By making the investment John recommends, Cliff would hold shares in a portfolio of unlisted or AIM-listed companies that would be expected to be able to be left free from inheritance tax to his children when he passes away. 

To be clear, Cliff is putting his capital at risk

John makes it clear to Cliff that the value of any BPR-qualifying investment, and any income from it, can fall or rise. Cliff may not get back the full amount he invests.

John also explains that BPR is assessed by HMRC on a case-by-case basis, and that this assessment happens when an estate makes a claim. Entitlement to claim the relief will depend on the company or companies Cliff invests in qualifying for BPR at the time the claim is made. Tax relief will also depend on personal circumstances, and tax legislation could change in future.

While Cliff is not expected to need to access this pot of money during his life, the investment will remain in his name, and so he will be entitled to request a withdrawal should he need to. John makes clear that withdrawals cannot be guaranteed as the shares of unlisted companies can be harder to sell than shares listed on the main market of the London Stock Exchange.

Peace of mind

Cliff is comfortable with these risks, and decides to act on John’s recommendation. He invests £1.8 million into a BPR-qualifying investment. Should Cliff be very unlucky and pass away tomorrow, he knows that Andrew and Nicole should inherit those shares without having to pay inheritance tax. As you can imagine, this represents valuable peace of mind for Cliff. 

At Octopus, we frequently work with advisers like John whose clients have sold a business. This is one of the scenarios we’ll be covering in The Estate Planning Show, a live, online show taking place on 12 and 13 May. We’ll look in depth at the types of companies that BPR qualifying portfolios can be invested in and which clients they might be suitable for. We’ll also be exploring scenarios like the one above, to help you identify new and existing clients who might benefit from an estate planning conversation.

To take part, go to octopusinvestments.com/estate-planning-show.

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