A growing number of clients could be caught by IHT as property values continue to grow, writes Justin Blower. Here he explains what advisers need to be aware of and how platforms can help
More and more people face being hit by an unexpected 40% inheritance tax (IHT) bill as many of us risk being pushed over the liability threshold for the first time due to property price rises.The average price of a property in the UK is now £209,054, according to the latest figures released by the Office for National Statistics.
Some steps have been taken to address this growing issue, with UK Chancellor George Osborne introducing a ‘family home allowance’ worth £175,000 per person by 2020, effectively pushing the nil-rate band from its current level of £325,000 to £500,000 per person or from £650,000 to £1m for married couples and civil partnerships.
However, many could still find themselves liable for IHT even once this increased allowance has been put in place.
So a family who own a property worth £700,000 and other assets valued at £800,000, for example, will still be faced with an IHT bill of £200,000 under the new threshold.
While we see some uncertainty in property prices resulting from current political and economic turmoil, it is still worth noting that property prices in the UK climbing by 8.2% in the year to April 2016 and 14.5% in London alone, pushing the average house price in the capital to over £600,000.
This leaves a significant proportion of homeowners exceeding the nil rate bands during their lifetime.
Meanwhile, IHT is also likely to remain a prominent issue for those with the wealthiest estates, as the new allowance tapers away for estates valued at more than £2m while those over £2.35m will not qualify at all.
Taking Advantage Of BPR To Mitigate IHT
Investing in business property relief (BPR) qualifying companies is one of several ways of mitigating IHT, with traditional options also including both gifting and trusts.
However, for many investors, BPR can prove a flexible and efficient alternative to these long-established routes. BPR works by providing shareholders in qualifying companies with 100% inheritance tax relief upon death.
It takes two years for BPR-qualifying shares to become exempt from IHT, while both gifting and trusts require an individual to live for seven years before the money or assets will qualify for IHT relief.
Gifting also takes away any control a client may wish to have over their assets, as they have no say over how the gift is spent.
Trusts enable a greater level of control, allowing assets to be held or invested until the trustee wishes to pass them to their chosen beneficiaries. But trusts can also prove a particularly expensive option, as clients will often have to seek legal advice before setting it up.
By contrast, investing in BPR-qualifying companies can speed up the mitigation process while still allowing total control over assets. BPR used to only apply to unquoted companies but now covers many businesses on the Alternative Investment Market (AIM) as well as those that qualify for the enterprise investment scheme (EIS).
Not all businesses will automatically qualify for BPR: the company must be deemed a ‘trading business’ in order to be eligible, meaning that the majority of activities must not involve wholly or mainly dealing in securities, stocks and shares.
How Can Platforms Help?
As IHT becomes an important consideration for a growing number of people, platforms need to develop their propositions to support ‘non-mainstream’ investments such AIM stocks as well as building relationships with specialist providers in this sector.
The Ascentric platform is allowing customers to protect some of their biggest lifetime savings through its partnership with Brown Shipley, offering exclusive access to an AIM Portfolio ISA.
The AIM Portfolio ISA works by providing access to a discretionary portfolio service that selects AIM listed companies that qualify for BPR, which in turns allows each business and its shareholders exemption from IHT.
Why AIM?
Investors should be aware that they are taking on equity risk by accessing BPR through AIM stocks although, crucially, this does allow AIM shares to provide a higher degree of liquidity compared to unquoted companies. AIM stocks also offer one of the most flexible ways to mitigate IHT, particularly in light of recent changes allowing small company shares that are listed on the AIM market to be held within an ISA portfolio.
For the first time ever this will protect an ISA from inheritance tax upon death; a crucial benefit, given the continuing popularity of the tax wrapper.
There is the option to access unquoted or AIM BPR-qualifying companies through a portfolio service or, alternatively, investors can select businesses independently on a case by case basis.
However, it can be difficult for individual investors to establish exactly which companies are eligible for BPR. There is no definitive list of qualifying companies and a firm may become ineligible at any time, meaning that the investor must contact each business directly on a regular basis if they want to ensure that their shares are still exempt from IHT.
Portfolio services can help overcome some of these complexities by having a professional portfolio manager in place who can oversee the status and investment performance of individual companies on behalf of the client.
Whichever route investors decide to take, the tax relief benefits of BPR-qualifying companies should not be the sole driver of an investment decision.
As with any investment, the quality of both the company and the experience and performance of the portfolio manager, where appropriate, should always be carefully considered.
SOURCE: Professional Adviser
