Alternative IHT strategies continue to grow in popularity as people look for more flexible options.
Most people are aware that they can gift up to £3,000 per annum, outside of their estate for IHT purposes. But many are reluctant to undertake significant IHT planning beyond this.
This may be the result of inertia or in many cases the perceived cost, particularly for those with complex financial affairs. One of the most common reasons is that people believe that it's not sensible planning to tie up capital or make significant gifts when future income or capital requirements are uncertain, especially with increasing longevity. So what are the alternatives?
The appeal of BPR investments
Investments qualifying for business property relief (BPR) are generating interest for IHT planning. BPR investments are exempt from IHT on the condition the qualifying asset or shares have been held for a period of two years. These include investments in forestry, agricultural land, certain qualifying companies listed on AIM and enterprise investment schemes. This option may be attractive if you haven't undertaken any IHT planning but wish to benefit from tax relief rather than make outright gifts of assets and wait for up to seven years to make sure they are exempt. However, while the tax advantages may be attractive, these schemes are often only suitable for sophisticated or high-net-worth investors and will typically carry a higher risk of capital loss.
There are positives and negatives to all of these BPR-qualifying investments, but one of the biggest stumbling blocks is access to capital. While AIM-quoted stocks should be relatively simple to realise, there is the risk of a loss due to the investment volatility associated with this market. So, spreading the risk via an AIM portfolio IHT service could be considered.
Options allowing access to capital
Over recent years there has been increasing interest in structures which use BPR to provide investors with IHT mitigation, but where, if circumstances change, it's possible to call upon the original capital.
Many investment offers align the interests of managers and investors by deferring annual management fees until exit, on the condition that a set level of investment returns are delivered – typically the benchmark is 3% per annum. It may also be possible to withdraw an ongoing income if required, although there are income tax and CGT considerations. The most important element of this option is ensuring there is a healthy cash turnover within the BPR investment to meet any withdrawal requests.
The underlying investments within these structures will vary, but may include things such as property finance and solar-based investments. Property finance is typically used to fund property developments at a low loan to value and short duration, with loans taken as a first charge over assets. This gearing can, of course, add an extra layer of risk to the investment.
Solar investments benefit from Feed-in Tariffs (FITs) or Renewable Obligation Certificates (ROCs), which provide a guaranteed price for each unit of electricity generated. Because the bridging finance loans are relatively short in duration, cash will continue to mature and this, along with additional funds raised from new investors, will meet any withdrawal requests from investors or their beneficiaries in the future. This is a crucial point and key to the effectiveness of such an investment. Of course, these attractions will depend on the continuing availability of FITs and ROCs, which cannot be guaranteed.
Growing popularity
These schemes are likely to become more popular in the next few years with the nil-rate band now frozen at £325,000 until April 2018. They are likely to prove attractive to those who are approaching later life and have yet to undertake any formal IHT planning or who simply don't want to be locked in if capital is required in the future. However, their appeal may be limited to those who fully understand the risks involved and are able to bear any risk to their capital that might be present within the investment.
This article is intended as a brief generic explanation of BPR investments and is not intended to promote any specific scheme which is currently available or may be available in the future. You are strongly recommended to take advice before entering into this type of investment scheme.
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