BR Q1 2022

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Frozen until 2026: inheritance tax allowances

The government has frozen inheritance tax allowances until 2026. This may sound innocuous, but it can be just as impactful as an outright rise in the rate of IHT tax.

Specifically, the nil rate band (NRB) is frozen at £325,000 until at least April 2026. The residence nil rate band (RNRB), currently at £175,000, has also been frozen until the same time.

There is a tapered withdrawal of the RNRB (£1 withdrawal for every £2 over the threshold) depending on the size of the deceased person’s estate. This taper threshold will also remain unchanged until at least April 2026.

To put this in perspective, consider that the average UK property (at £276,759 in January, as noted above) is only £48,241 short of the standard NRB. Consider, also, that the NRB is below the average wealth per adult over 55, as indicated in the following graph.

Inheritance Tax is a growing issue for many families and even during the pandemic many advisers have recognised that delaying a BR investment only delays the BR qualification period.

Simon Housden, Sales and Marketing Director, TIME Investments.

Complicating factors

UK: AVERAGE WEALTH PER ADULT

PHYSICAL WEALTH

PRIVATE PENSION WEALTH

TOTAL WEALTH

AVERAGE WEALTH PER ADULT

PROPERTY WEALTH (NET)

FINANCIAL WEALTH (NET)

20 to 2425 to 2930 to 3435 to 3940 to 4445 to 4950 to 5455 to 5960 to 6465+ yearsAll persons

£10,625£15,618£20,169£23,167£29,444£25,673£28,029£30,350£31,750£35,813£28,185

£14,583£44,382£36,517£62,222£89,444£90,865£100,000£125,000£141,500£177,500£111,343

£5,417£13,090£25,787£45,333£81,889£110,913£148,558£208,950£241,850£172,250£131,191

£1,354£2,135£8,146£15,778£42,278£24,087£28,702£40,850£58,450£71,000£39,320

£32,135£75,393£90,730£146,722£243,167£251,731£305,337£405,000£473,550£456,563£309,824

Source: Office for National statistics

For an increasing number of families these allowances will barely cover the value of their homes, even before savings and other assets are taken into account.

In fact, you might have a smaller nil rate band on your death if you make gifts during your lifetime that aren’t covered by your tax-free gift allowances and you die within seven years of making the gifts. The value of these gifts will reduce or eliminate your nil rate band, meaning less of your estate will be passed on tax-free.

Unfortunately, the problem is made worse by many people being unaware of the potential problem looming on the horizon. This has caused many hardworking families to be caught in an Inheritance Tax trap of being unable to avoid it.

Using Business Relief (BR) to mitigate IHT liabilities

IHT was not designed for just the super-wealthy

BR reduces the value of a business or its assets when working out how much IHT has to be paid. Via this scheme, ownership of a business, or share of a business, is included in the estate for IHT purposes.

BR allows you to IHT relief of either 50% or 100% on some of an estate’s business assets, which can be passed on either while the owner is still alive or as part of the will.

You can get 100% Business Relief on:

One of the enduring myths around IHT is that it was designed for the super-rich, but that ‘normal’ people are now finding themselves caught in the net as a result of house price rises.

The truth is that inheritance tax was never designed for the super-rich only. Harvey Cole, economic and development consultant and former leader of Hampshire County Council, provides these interesting figures:

In 1938-39 there were 153,000 estates liable to estate duty, which was almost 30% of the number of deaths, compared to just 16,000 in 2011-12.

Over the years, rather than increasingly clobbering the middle classes, IHT has been dramatically reduced, with the tiny number of wealthy people left paying it clamouring about its unfairness.

Just before the second world war, with rearmament consuming vast government expenditures, estate duty contributed almost 15% of total tax raised, compared with less than 2% today.

a business or interest in a business shares in an unlisted company

You can get 50% Business Relief on:

shares controlling more than 50% of the voting rights in a listed company

land, buildings or machinery owned by the deceased and
used in a business they were a partner in or controlled

land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

You can only get relief if the deceased owned the business or asset for at least 2 years before they died.

A return to the past?

It used to be that about 96% of people could avoid inheritance tax, according to the Inland Revenue. No more. Now, the numbers of those being caught out are rising and fast.

IFA Promotion, the trade body that promotes independent financial advice, has said that Britons pay about £1.1bn too much inheritance tax every year.

As always, IHT will remain unpopular and controversial, coming as it does at a time of loss and mourning. The blow can be especially painful when it impacts families with quite modest assets, unlike the wealthy who make use of the panoply of reliefs to absolutely legally avoid paying.

Fortunately, these legitimate ways to mitigate against this tax are available to ordinary folks, but the question is whether more of them will put more of their estate values into assets that attract reliefs and advice to put them there.

Photography byInterview by

6. What's on the Horizon

Frozen until 2026: IHT allowancesWhat the Managers Say

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BR comparison table

MANAGER NAME

DESCRIPTION OF OFFER

PROVIDER YEAR FOUNDED

PROVIDER ASSETS UNDER MANAGEMENT

PRODUCT ASSETS UNDER MANAGEMENT

SECTOR

LAUNCH DATE (OF SERVICE)

NUMBER OF INVESTEE COMPANIES

ANNUAL RETURN SINCE INCEPTION

TARGET ANNUAL RETURN AND/OR TARGET YIELD (WHERE STATED)

MINIMUM INVESTMENT

INCOME AVAILABLE?

NUMBER OF DIRECTORS

LEGAL STRUCTURE

INITIAL FEE

AMC

PERFORMANCE FEE

PERFORMANCE HURDLE

TARGET LIQUIDITY

Octopus Investments

The Octopus Inheritance Tax Service is a discretionary Managed Service investing in one or more unquoted companies. The Service has three specific client objectives: 1. Inheritance tax relief on their investment when they die 2. Predictable 3% investment growth per year 3. Weekly access to their investment if they need it.

2000

£12.5bn (as of 31 December 2021)

£2.7bn (as of 31 December 2021)

Renewable energy, healthcare infrastructure, property finance and fibre infrastructure

2007

Currently 1

No annual return as this is a Discretionary Managed Service. Target return is 3% per year net of AMC.

3% per year, net of AMC

£25,000

No

3 (2 of which are independent)

Discretionary managed service

2%

Up to 1% + VAT per year (AMC is deferred and contingent on performance meeting 3%)

N/A

N/A

1 week target, never taken more than 1 month to provide liquidity

Blackfinch Investments Limited

The Adapt IHT Portfolios are our flagship Inheritance Tax (IHT) solution and are well established. It offers return potential and competitive charges alongside a route to IHT relief. Our four model portfolios cater to the need for diverse, ethically focused IHT offerings. Blackfinch only takes its annual management fee of 0.5% plus VAT after achieving a minimum target return of 3% p.a., 4% p.a., 4.5% or 5%+ p.a., depending on which of the four model portfolios an investor has selected.

1992

£650.1m (as at 21/03/2022)

£259.1m (as at 21/02/2022)

Asset-backed lending, property development finance and renewable energy generation

2013

3 underlying companies comprising of 62 energy assets and 49 loans

Annualised returns since inception (31/12/2013) to 28/02/2022 for each portfolio are as follows. For discrete data, please see latest monthly factsheet available at https://blackfinch.investments/iht
Ethical - 2.96%, Balanced - 3.88%, Balanced Growth - 4.34%, Growth - 4.78%

Ethical - 3%, Balanced - 4%, Balanced Growth - 4.5%, Growth - 5%+

£25,000

Yes

2

Discretionary Portfolio Service

2% (1% dealing fee on the net amount)

0.5% + VAT deferred until exit and only if target return has been achieved

N/A

For AMC to be taken, client must achieve above target return, which are as follows for each portfolio: Ethical - 3%, Balanced - 4%, Balanced Growth - 4.5%, Growth - 5%+

2-4 weeks

Beringea LLP

Proven Estate Planning Service - A discretionary management service platform that provides investors access to investment in four trading companies – two lending and two solar companies. Each of these companies is expected to qualify for business relief and provide investors with mitigation against inheritance tax exposure.

1992

£400m (Dec 2021)

£90m GAV (Dec 2021)

Secured Lending/Solar Investment

2021 - launch of PEPs platform.
Individual investee companies started trading 2013 - 2016.

4 (2 secured lending companies and 2 solar investment companies)

The ProVen Estate Planning Service (PEPS) platform was launched in Feb 2021. Since its launch, the blended share price growth of the four trading companies on the PEPS platform stands at 8.2%. Over the last five years the blended returns for the four trading companies, including time prior to PEPS, stands at 4.7%. As with all investments, capital is at risk and past performance is not a guarantee of future results.

4-5% pa

£25,000

Yes

At least 3 in each investee company (including two independent board members)

Discretionary Management Service

2%

1.50%

0

NA

30 days