Flexible IHT planning - Business Property Relief

Posted on November 21, 2011

Flexible IHT planning tool

For most people in the UK, IHT is not given great consideration principally because of the belief that it only affects the rich. However, rising property values in the past 20 years mean that many issues being faced by families today are a direct result of being dragged into the IHT net by stealth means. There a number of established ways to mitigate IHT and these include making a will, gifting, insurance, equity release, insurance and trust planning. The latter is now very much under the Government’s microscope as all new plans need to be disclosed under the DOTAS regime.

One of the major problems with all of the above is that the donor is required to give up control over some or, in most cases, all of their estate. Assets are transferred to someone else which may not always be desirable. Another issue is that gifts and trusts also take seven years to be fully exempt from IHT. This then requires careful financial planning which sadly is not always on the mind of the donor. All is not lost as there is way of mitigating IHT without the need to relinquish control and enables estates to be free of IHT within two years. Unfortunately, our research shows that this simple area of financial planning is not widely known.

This mitigation strategy is available through business property relief or BPR.

BPR enables you to claim relief on any business assets that you own and includes shares in qualifying businesses. The types of company which qualify for BPR must be unquoted although this definition includes AIM and Plus markets companies and they must also actively trade, that is, they cannot be an investment company. There a number of established options of utilising businesses which qualify for BPR. The two most common are AIM portfolios and Forestry. However, there are other trading opportunities which can be considered and these include:

• property development • owning and managing public houses • debt factoring • leasing; and • renewable energy

Most of these trades do offer a lower-risk profile as they are asset backed which, provided you do not borrow against these assets, do offer security over the long term.

There are two fascinating areas of planning which can also be incorporated under any BPR qualifying investment.

Business Asset Rollover Relief

Business Asset Rollover Relief enables someone to defer any Capital Gains Tax due when business or trading assets are disposed. If they acquire other assets costing the same as, or more than, the amount received on a disposal of the old assets, the relief allows the individual to postpone paying tax until disposal of those new assets. If new assets are acquired for less than the amount received on the disposal of the old assets, partial relief will be available.

You must acquire the new assets, or enter into an unconditional contract for the acquisition of the new assets, in the period twelve months before, and thirty six months after the disposal of the old assets.

Replacement relief

Replacement relief utilises the characteristics and timescales of Business Asset Rollover Relief except that it enables the asset owner to continue to benefit from 100% relief from Inheritance Tax. Therefore for a business owner who is looking to sell or has indeed already sold, further tax planning may be considered.

Example

Mr Delamare has agreed to sell his printing business for £1 million having built the business from scratch 5 years ago and does not wish to pay CGT of approximately £ 280,000 and has previously used his entrepreneurs relief. Mr Delamare is no longer keen to have all his assets in one asset class and therefore could take advantage of vehicles offering different qualifying trading activities.

Mr Delamare could reinvest the £ 1 million proceeds in his own private limited company and participate in a range of trades which qualify for Business Property Relief. By doing so he remains in control of the money, has claimed CGT deferral through Business Asset Rollover Relief and will continue to protect the sales proceeds from IHT through Replacement Relief.

If this money is left in the company, then upon death the CGT liability will disappear and also no IHT will be payable on this part of his estate. The trading company environment also enables Mr Delamare to take income arising from trading profits should this be desirable.

	Do nothing	Re-invest in trading business
Sale proceeds	1,000,000	1,000,000
Pay CGT	(280,000)	Nil
Net proceeds	720,000	1,000,000
IHT liability on death	(288,000)	Nil
Value of estate	432,000	1,0000,000**

** Assumes no growth in value and traded for two years

A partnership would be formed with other like-minded investors with similar companies to undertake a particular project and capital would initially be spread across a number of different partnerships. The shareholder of each trading company is then asked whether they wish to participate in these projects and is free to say no. At the end of each project, capital will be recycled using the same process and any profits can be distributed as income to shareholders if they wish.