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You might have heard of Business Relief, also known as BPR or BR.
Of all the ways to plan for your estate, investments that qualify for Business Relief are often the simplest to understand.
BR involves making an investment, something that most will be very familiar with.
The difference with this type of investment is that it should qualify for relief from inheritance tax.
Shares in companies that qualify for BR should be able to be passed on to loved ones free from inheritance tax upon death, as long as they have been held for two years and are still held at the time of passing.
‘What’s the catch?’ you ask.
Great question. And to answer it you’ll need to understand why the relief exists in the first place.
A quick history lesson
BR was introduced as part of the 1976 Finance Act, to allow unquoted businesses to be passed down through generations without needing to be broken up and sold to pay an inheritance tax bill.
Any cost to the government from lost inheritance tax would be outweighed by the value of businesses continuing to prosper.
The legislation was quickly recognised as an opportunity to encourage people to take on the risk of investing in unquoted trading businesses, regardless of whether they run the business themselves.
To qualify for relief, companies must be listed on the Alternative Investment Market – the London Stock Exchange’s junior market – or not be listed on any stock exchange.
The incentive of inheritance tax relief can compensate investors for taking on the additional risk of investing in such companies, and encourage investors to support trading businesses with growth potential.
The benefits of using BR as part of your estate planning
BR-qualifying investments can be an interesting part of an estate planning strategy. In a nutshell, BR offers three things over traditional estate planning such as gifting: access, speed and simplicity.
Access and control
One of the biggest barriers to undertaking estate planning is that it can be unappealing to lose access and control of your wealth in your lifetime. When making gifts, for example, once you’ve made the gift, you no longer have access to the asset you’ve given away even if you find you need it later on.
It can be difficult to know how much money you’ll need behind you to maintain the quality of life that you want in your later years. You might, for example, worry about how much wealth you need to retain to cover unexpected costs such as care fees.
A significant benefit of making a BR-qualifying investment is that it’s an investment in shares in your name, which stays in your name during your lifetime.
This means you could choose to sell some or all of your shares if needed later down the line. Although you need to be aware that the ability to sell shares isn’t guaranteed and it can be harder to sell shares in BR-qualifying companies than those listed on the main market of the London Stock Exchange.
Speed and simplicity
Another key benefit of BR is that it can achieve estate planning objectives in a shorter time frame than other strategies.
Making gifts or settling assets into trust will typically take seven years to become completely free from inheritance tax. This can be a long time to wait before knowing that you won’t be leaving a liability behind. None of us can reasonably know how long we will live, and this consideration becomes especially difficult later in life.
BR-qualifying investments, on the other hand, can be passed to beneficiaries free from inheritance tax after being held for just two years, as long as they are still held at death.
While some estate planning strategies can be complicated, investing in BR-qualifying shares is typically much simpler than setting up a trust or using life insurance. There are no complex legal structures, and there’s no requirement for underwriting or medical questionnaires.
These are attractive benefits but let’s be crystal clear about the risks.
BR won’t be for everyone
Since investing in BR-qualifying businesses involves taking on risk, it won’t be suitable for everyone with an inheritance tax liability.
Remember that the value of a BR-qualifying investment, and any income from it, can fall as well as rise. You might not get back the full amount you invest.
The benefit of tax relief will depend on your personal circumstances. Availability of relief depends on the companies you invest in maintaining their qualifying status at the point at which a claim is made (i.e., after you have passed away and your beneficiaries make a claim on behalf of your estate). You should also be aware that tax legislation could change in the future.
The shares of unquoted companies and those listed on AIM could fall or rise in value more than shares listed on the main market of the London Stock Exchange.
How can I make a BR-qualifying investment?
There are specialist investment providers, such as Octopus, who manage portfolios of BR qualifying investments on behalf of customers. Other companies offer this service too, so talk to your financial adviser about which qualifying investment might best suit your needs.
Is BR right for me?
BR isn’t for everyone and in many cases it is best considered as one element of a wider estate planning strategy. For example, an individual might gift some of their assets to their children during their lifetime, keep a sum of money in cash should they need it, hold an investment that returns them a regular income, and also make a BR-qualifying investment to help reduce the inheritance tax bill on their estate when they die.
Your financial adviser will be able to assess what form of estate planning might be appropriate given your circumstances, objectives and risk appetite.
Click here to watch an animated video that explains BR.
To read about practical tips on how to prepare your estate for your loved ones, have a read of the next blog post in this series: Your estate planning options, Making sense of inheritance tax & Practical steps to prepare your estate for loved ones.
We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest.