I am sure it will not be lost on any professional reading this blog, that the freezing or reduction of tax allowances and exemptions in the Autumn Statement means that the estates of many more people could become liable to pay inheritance tax.
As you are also well aware, IHT is charged at 40% on the value of an estate over the current nil rate band – for an individual, currently, this is £325,000 plus the £175,000 residential nil rate band if applicable.
However, the IHT nil rate band has been set at £325,000 per individual, and £650,000 for a married couple as long ago as 2009. When he was Chancellor of the Exchequer, Rishi Sunak extended the freeze until 2026, and in turn, his new Chancellor Jeremy Hunt has further extended this until April 2028. Whilst it was undoubtedly originally intended to impact the wealthier in our society, house prices alone could see families who never imagined that Inheritance Tax was something they would ever have to worry about, dragged into its trap.
As previously mentioned, the residential nil rate band of £175,000 can extend the nil rate band to £500,000, or £1,000,000 for a married couple but this has also been frozen until April 2028. This can have a huge impact on families at risk of incurring an inheritance tax liability. Indeed, according a recent survey from national estate agent Savills, one in 42 homes in the UK are now valued at £1 million or above.
Because of the new taxation policies, laid out and extended last autumn and the worrying and currently irreversible impact they are having, we felt it would be pertinent to remind ourselves of a way to help mitigate IHT payments by utilising ‘Business Relief’.
This relief was originally established to allow family firms to pass on their business through the generations without incurring large tax bills. However, it was extended to include any unquoted shares in a trading company, (those listed on the Alternative Investment Market,) which allows it to be used in estate planning.
Investments into a business relief-qualifying company becomes zero-rated for inheritance tax after two years. If held until death, they can be passed on free from a 40% inheritance tax charge. This time frame is, of course, in contrast to the inheritance tax exemption for gifts, which take seven years to pass out of the estate. This can make it a valuable tool to consider for elderly client who have not done as much estate planning as they might have wished, or indeed, for those who are in ill health.
Another benefit of business relief is that the money, although out of the estate after two years, remains in the control of the investor. This waylays, what is a significant concern for many people, providing peace of mind. Especially with the current generationally high rates of inflation and cost of living crisis and as the government indecisively dithers around the cap to long term care costs, and how to pay for it.
Business relief also fulfils its original function, enabling owners of a business (or those who hold a stake in one) to pass on their shares in the business free from inheritance tax – as long as the business activities meet the qualifying criteria for relief. This also applies if they sell some or all of the business – as long as within three years they invest some or all of the proceeds in another business relief-qualifying business.
It can also be useful tool for people who have built up significant ISA investments over their lifetime. While free of income and capital gains tax, ISAs fall within a person’s estate for inheritance tax purposes. A fact that many forget, thinking of ISAs as ‘tax-free’. Transferring some or all of an existing ISA into one that’s invested in business relief-qualifying shares enables the investor to retain ISA tax benefits, as well as control of their money. Once they have held the new ISA for two years, it should be zero-rated for inheritance tax.
Therefore, for your existing of new clients potentially facing an uncomfortable inheritance tax bill, business relief could be an option, bearing in mind the risks involved. It is our view that comprehensive estate planning is best undertaken with a solicitor and financial collaborating, so why not ask your chosen IFA partner about the investment vehicles they can recommend that attract business relief or find a qualified partner on the SIFA Professional Directory. Professional financial input is essential as AIM shares may attract higher risks and this needs to be properly explained to the client, along with the obvious tax benefits.
