Mitigating Inheritance Tax through Business Property Relief is an increasingly popular strategy. Here, Ian Battersby, Business Development Director at Seneca Partners, tells findaWEALTHMANAGER.com why.
Why is it that affluent individuals are looking for alternative ways to reduce the IHT bill which will eventually be due on their estate?
The traditional methods for mitigating Inheritance Tax (IHT) such as outright gifts and trusts are not always flexible enough for everyone, especially with increasing life expectancy and the unknown challenges that can create. The thought of transferring assets outside of an estate which might then be required at a later date – such as to pay for residential care or merely funding a longer than expected retirement – is a serious barrier for many people.
Equally, the seven-year timeframe before lifetime giving provides 100% IHT mitigation is less than ideal, especially for elderly clients. These factors are important and growing drivers behind products and services which leverage BPR, and are becoming an increasingly dominant theme in the planning work of many financial advisers today.
So, what is BPR?
BPR is a statutory relief available on investments in unquoted businesses. It was actually introduced in the Finance Act 1976, primarily to allow small business owners to pass on business assets to their beneficiaries without incurring IHT. Until that point, many businesses were being broken up or sold in their entirety in order to pay the IHT bills due on estates – which was clearly not ideal in a vital sector of the economy.
The scope of the relief has widened over time allowing more people to access it. Since 1996, investors with small, non-controlling shareholdings in qualifying businesses can claim 100% IHT relief.
So what constitutes a “qualifying business” for BPR purposes?
There are a number of clear exclusions but, in brief, the emphasis is on shares that are held in companies which perform “trading activities”, which are distinct from “investment activities”.
In Seneca’s IHT Service, the underlying trading comes in the form of fully-secured, short and medium term lending. Largely, because debt funding is one of our core day-to-day activities alongside equity investing and our corporate advisory services.
That would probably be a generally fair comment, when compared to traditional solutions but, conversely, BPR solutions are much easier to implement, considerably more flexible than other options and are effective in only two years – which is far quicker than most of the alternatives.
However, the real driver for most people is that they do not have to pass ownership of their assets away in order to achieve the IHT mitigation benefits they seek. From there it becomes a case of ensuring that the investment manager is of the required standard in terms of managing the investment into trading activities both safely and wisely.
What then is Seneca’s approach to managing the investment safely and wisely?
Our belief is that most people who have worked hard to accumulate their wealth throughout their lives don’t want to see it dissipate under an aggressive investment strategy. For that reason, we see capital preservation as the overriding aim rather than chasing big returns; we target a return of 4% per annum, but the key is ensuring capital is protected rather than chasing higher returns by taking increased risk. We achieve that through a very conservative approach to lending on a fully secured basis across a diverse range of borrowers where we can clearly see our repayment source.
Essentially, the loans are short and medium term, tightly controlled within a strict Credit Policy and Risk Management framework and managed by a senior team with vast experience in credit and credit underwriting. We also have a dedicated banking division and debt advisory arm within the Seneca empire, advising on over £2bn of complex debt issues affecting SMEs and so it is a particular area of strength for us.
So why does this type of IHT mitigation strategy appeal to investors?
In short, it is the speed of achieving IHT relief at only two years, retaining ownership of the assets as opposed to giving them away, the ability to access the funds usually within a short notice period, and the simplicity of setting it up.
For those who think using BPR may be an attractive option, what is the way forward?
Most good-quality advisers are very familiar and knowledgeable about how BPR works, and have access to excellent research material about the various BPR products in the market place. But IHT planning is a complex area and we would always recommend advice be sought from a suitably qualified wealth management and financial planning firm.
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