After we delved into EIS and VCTs in previous editions, we now turn our stare to BR qualifying assets. We take a whistle-stop tour of what, how, why and who of BR investments as a recap of this valuable investment and estate planning tool as we chug towards the end of the tax year.
What is business relief?
Business Relief (BR), formerly referred to as Business Property Relief, was introduced to allow small family-run businesses to be passed down the generations.
The general principle is that a privately owned business can have its shares passed down to their children, in the event of death provided that a number of conditions are met.
However, over the years the scope of BR has been widened, making it an attractive option for individuals looking to invest in companies in order to remove a potential inheritance tax (IHT) burden. Once assets qualifying for Business Relief are held for two years, they are exempt from IHT (providing they are still held at the time of death).
How are BR-qualifying assets available?
BR is usually available through investing in shares in a qualifying company listed on the Alternative Investment Market (AIM), either directly or through an AIM portfolio. The challenge with individual holdings is selecting the right funds as with any investments, however, there is also an accessibility issue in having holdings in smaller companies. That is why so many decide to use AIM portfolios over holding individual shares.
Additionally, in 2013 the UK government changed the rules to allow AIM-listed shares to be held within Individual Savings Accounts (ISAs). That means that investors can now hold BR-qualifying shares within a tax-efficient ISA wrapper. So, if access to the funds is required within the investor’s lifetime (because who knows what might happen) In reality, BR investments are used as an IHT then the withdrawals would be free of tax.
What are the possible peaks of BR investments?
Investing in companies that qualify for BR means any investment made will have 100% IHT relief after just two years, provided the investments are held at the time of the death of the investor.
With a Business Relief-qualifying investment, the shares remain in the name of the client throughout their lifetime. As a result, they can choose to sell some or all of the investment should they need to (although any money withdrawn will no longer be exempt from IHT).
In the event of death after two years, the BR investment would be exempt from IHT and it could be distributed to other beneficiaries upon death, free of IHT.
Whoever inherits the investment, no matter their connection to the investor is entitled to the same IHT relief from the investment for as long as they choose to keep the BR-qualifying shares. The shares are 100% exempt from IHT straight away and the person who receives these shares doesn’t need to wait two years.
In reality, BR investments are used as an IHT planning tool, the portfolio would have to drop in value by 40% or more before the investor can technically be considered to have made a loss. This is because the current rate of IHT that would apply to the funds invested if they were not in BR-qualifying assets would be 40%.
Getting assets into BR qualifying investments is also much faster and simpler than the widely used alternative which is to shield assets with trust arrangements or through outright gifting strategies. It is only 7 years after putting money into a trust or gifting them away directly that they are outside of an estate for IHT, compared to the 2 years if they are investing in BR-qualifying assets.
Ignoring the estate planning benefits for a moment, these types of investments, being into smaller businesses, usually have scope for potentially higher returns. But as nothing comes for free, there is usually increased volatility to contend with.
What are the potential pitfalls of BR investments?
As with any investments, the value can fall as well as rise as you all well know, so any capital placed into BR investments is always at risk.
There’s always the chance that the government could change the rules around BR, as there is with any industry rules, regulation, or legislation. Whilst we normally get a bit of warning, one of the downsides could be that relief is lost if the world changes and the politicians get involved.
As mentioned above, higher returns could be on the cards, but there’s no such thing as a free lunch, and with higher potential rewards comes higher- than-average volatility. As long as investors are aware, happy and suitable to be investing this shouldn’t cause too much of an issue.
BR investments don’t have the same protection surrounding them as the assets within a trust arrangement would. This is a personal preference and would depend on an investor’s circumstance as to whether asset protection is key to their financial planning and personal circumstances.
Who needs BR investments in their lives?
BR-qualifying assets are usually implemented as part of a strategy surrounding estate planning, mostly because of the associated IHT benefits. A bit like EIS and VCTs are usually implemented for those who are putting in place an income tax strategy. But they are also investments in their own right, offering capital growth, a consistent income and the opportunity for increased risk and reward to investors. So, in theory, these types of investments could be suitable for a wide range of investors.
With the nil rate band having been frozen since 2009 and IHT receipts only trending upwards, this is not a strategy merely for the wealthy, as more and more people exceed the existing IHT brackets.
Similarly, BR investments are not just suitable for the older generation. However, if an investor needs to get assets out of their estate for IHT purposes, quickly for any reason, then these types of investments could of course fit the bill.
For those who want an alternative to gifting, whether that be into trust arrangements that may end up being costly or directly to beneficiaries where the individual loses control of the asset, BR-qualifying investments are an avenue to explore. They are simple to implement, are not usually overly expensive and also allow access to your capital in case it is needed.
Finally, we can’t round off without mentioning business owners who have family-run companies or want to continue their business legacy. Even though BR is no longer a relief applied solely to family-run businesses, the benefits to these companies and families remain the same and just as valuable.
