BUSINESS RELIEF
Industry Update - April 2022
1. INTRODUCTION
The latest news, updates and statistics on BR
2. Market Update
3. Considerations for Investment
4. Industry Analysis
5. Managers in Focus
6. What's on the Horizon
7. Further Learning
In partnership with:
Accredited by:
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business relief
Industry Update
q2 2021
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
Opening Statement Acknowledgements and Thanks Key Findings
1. Introduction
Market Composition Fees and Charges MICAP Market Snapshot Case study: Transfers benefitting from relaxation of the two-year holding periodt
3. Considerations For Investment
IHT: no longer a tax for the super-wealthy Government streamlines IHT reporting requirements
Mental capacity issues and investments under discretionary management Russia-Ukraine: BR on AIM in times of crisis Rise of the inheritance economy The renewable energy opportunity for growth and income Considerations for Business Owners What the managers say
2. market update
Beringea Blackfinch Octopus TIME Investments Zenzic Capital Comparison Table
5. managers in focus
Frozen until 2026: IHT allowances What the managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclaimer
7. further learning
scroll down
Business Relief (BR) is the topic of the moment
Photography by Interview by
03
n the shadow of the Russia-Ukraine war, a new report by the International Monetary Fund (IMF) has indicated that growth in the UK economy will slow as pricing pressures lead households to cut spending, while rising interest rates are expected to ‘cool investment’. The report predicts that the economy could grow by 3.7% this year, down from the previous forecast of 4.7% made in January 2022. Meanwhile, the annual inflation rate climbed to 7.0% in March from 6.2% in February, its highest since March 1992. As a result, households are facing the biggest cost-of-living squeeze since records began in the 1950s. No longer a rich man's burden At the same time, Britain’s most hated tax, the inheritance tax (IHT), is making its way down the income bracket. IHT receipts have swelled to record highs. Recent IHT statistics revealed that tax receipts reached a record high of £5.36 billion for the period between April 2021 and February 2022. This is a notable increase of £700 million from the amount recorded by HM Revenue and Customs (HMRC) at the same time last year. Inheritance tax used to be thought of by so many as a tax for the rich, but that’s changing as more and more people get caught by the IHT net. HMRC said the record high IHT receipts can be partially attributed to higher volumes of wealth transfers that took place during the peak of the Coronavirus pandemic, although it cannot verify this until full administrative data becomes available. The majority of people’s estate value comes from the property they own. A recent Freedom of Information request to HMRC by Continuum revealed that UK residential property now makes up well over a third of the value of assets held by estates being assessed for IHT. While the IHT thresholds have not changed since 2009 (and have been frozen until 2026), house prices in the UK have continued to surge. The average UK house price was £277,000 in February 2022, which was £27,000 higher than at the same time last year, according to the Office for National Statistics (ONS). Are survivors paying too much inheritance tax? “In some situations, HMRC may be taking more than its fair share of people’s inheritances,” says one adviser. Business Relief (BR): a safe harbour during the storm BR is a key topic of the moment. In this time of increased uncertainty, there is an increased awareness of potential IHT exposures and an acceptance that big decisions around business succession and wealth transfers need to be made sooner rather than later. BR helps to strategically manage wealth to maximise the amount beneficiaries will keep. Traditional strategies for mitigating IHT, such as gifts and trusts, are not always flexible enough to cope with the challenges of the moment. Investing in BR-qualifying companies could be the solution. Recent clarifications regarding powers of attorney and allowing an attorney to invest via a discretionary management fund, of the form that many BR offers take, could make BR an even more flexible option. So it’s well worth taking a look at the latest developments in BR and this context.
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- Name Surname
Britain’s most hated tax, the inheritance tax (IHT), is making its way down the income bracket.
Guy Tolhurst
Managing director Intelligent Partnership
Powers of attorney and wording re discretionary investments (SFE) Russia-Ukraine: BR on AIM in times of crisis Rise of the inheritance economy The renewable energy opportunity for growth and income Considerations for Business Owners What the managers say
The majority of people’s estate value comes from the property they own.
This report and the research behind it would not have been possible without the help and support of a number of third parties who enthusiastically shared their time and expertise. These busy professionals went to great lengths to provide us with data, their insights on the market, and useful comments and suggestions while peer reviewing initial drafts. We thank Tish Hanifan, founder and Joint chair at Society of Later Life Advisers, who once again generously provided the opening statement for this update. We are grateful for her unfailing support over the years. We’d also like to show our gratitude to Shane Elliott and Andrew Webster of Beringea; Dominique Butters of Blackfinch Investments; Jessica Franks of Octopus Investments; Stephen Daniels, Henny Dovland, and Simon Housden of TIME Investments; Daryl Thorpe of Zenzic Capital. The expertise of one and all have improved this study in innumerable ways and their support as sponsors has made this update possible. Any errors and omission are our own. We have relied upon MICAP for most of the data that we have based the update upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The update is made possible by our sponsors, who have contributed copy to the update and supported us by helping to meet production costs. So, a big thanks to Beringea, Blackfinch, Octopus, TIME, and Zenzic.
Acknowledgements and thanks
learning objectives for cpd accreditation
Identify the main developments and news in the Business Relief market Describe how Business Relief sits within the current IHT landscape Evaluate the key fees and charges applied by Business Relief managers Recognise the various factors that will affect the Business Relief market in the coming months Describe the types of open Business Relief offers available on the market Benchmark current products and providers against each other on key investment criteria
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After you have reviewed this publication and before we fulfill your CPD certification request, we will be requesting your feedback on it. Your collaboration will assist us to enhance the learning activity, and will inform improvements to future publications.
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Find out more at Managers in focus
Readers can claim up to 2 hours’ structured CPD. By the end of the update readers will be able to:
Source: Office for National statistics
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EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
Contact us: lisa@intelligent-partnership.com Sponsorship Opportunities: chris@intelligent-partnership.com
Key findings
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Reduced rate of IHT you pay on some assets if you leave 10% or more of the ‘net value’ to charity in your will
36%
Percentage of adults in Great Britain who do not have a will
61%
Percentage by which new government measure expects to reduce IHT reporting burdens
90%
Current value of the average property in the UK (the result of an annual price rise of 10.9%)
Both the Nil-Rate Band (NRB) and the RNRB will be frozen until that date
5 April 2026
time it takes for a gift to be IHT-free, provided the gift-giver is alive
7 years
IHT receipts received by HMRC during the tax year 2020 to 2021 (an increase of 4% (£190 million) on the tax year 2019 to 2020)
£5.4 billion
£5.5 billion
IHT receipts for April 2021 to February 2022 (£0.7 billion higher than in the same period a year earlier)
This update has thrown up some interesting, sometimes alarming, sometimes revealing facts and figures. So we've selected a few to give you a flavour of the current context, some food for thought and some indicators of the fundamentals you should be aware of.
£276,755
key findings
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here an investment manager is engaged to manage a client’s investments on a discretionary basis, it is important to consider the arrangements in place in the event that the client loses mental capacity. This is especially important if there are circumstances, such as the client’s age, where addressing this issue should be automatic. The loss of a client’s mental capacity is likely to trigger the termination of the investment manager's terms of engagement. What, then, happens to the funds under discretionary management? This article specifically considers the revised guidance issued in March of this year by the Office of the Public Guardian ("the OPG") in relation to provisions regarding the management of investments on a discretionary basis in property and financial affairs lasting powers of attorney ("LPAs"). Planning ahead for the loss of mental capacity Whilst an individual still has sufficient levels of capacity, they are able to make an LPA which delegates certain powers to their attorney(s) to make decisions on their behalf, once the LPA is registered with the OPG. If carefully drafted, an LPA containing the necessary provisions would enable a validly appointed attorney to engage an investment manager to manage, or to continue to manage, investments on a discretionary basis. The position previously In 2015, the OPG issued guidance ("the 2015 Guidance"), making it a requirement that an LPA contain an express instruction enabling an attorney to appoint a third-party specialist to manage investments on a discretionary basis or, where there was a scheme already in place, for the management of that scheme to continue. The 2015 Guidance was based on law of agency: an agent (the attorney in this case) cannot delegate their authority and must carry out their duties personally. The 2015 Guidance also reflected the position that many financial institutions were taking where they were requiring express authority in an LPA to allow the attorney to engage them in the management of a fund on a discretionary basis. However, in practice, many LPAs have not contained this express instruction and this has left attorneys in a difficult position. The attorney would have a duty to manage the investments but, in all likelihood, the majority of attorneys would not have the necessary expertise to be able to manage the investments in the same way as a third-party specialist. In order to rectify the position to allow an attorney to delegate investment management powers to a third party, it was necessary for an application to be made to the Court of Protection ("the Court") in order for the Court to give express authority to the attorney to delegate powers in this way. Such an application is timely and costly: it can take around 10 months to make and an attorney is likely to require legal advice in relation to making it. Ultimately, the result of the failure to include an express instruction in an LPA is that it could put investments at risk. The position now: OPG revised guidance In March of this year, the OPG revised its guidance so that including an express instruction in the LPA in relation to delegating powers to investment managers to manage investments on a discretionary basis is no longer necessary. Given how often such an express instruction was omitted, the revised guidance has been welcomed in many quarters. However, the OPG’s guidance has been cautiously worded with the recommendation that where a donor would like their attorney to have the power to delegate investment decisions to a third-party specialist, the donor should consider obtaining legal advice on whether it is necessary to include an express instruction in relation to this in the LPA. The OPG’s guidance states “this is because at least one major financial institution has taken the position that existing contracts relating to discretionary investment management schemes will come to an end on the loss of capacity of the donor of an LPA, and that any new investments by attorneys in discretionary investment management schemes will only be permitted if there is an express instruction on the matter in the LPA”. Conclusion Although the OPG's guidance is clear, a prudent donor should still obtain legal advice in relation to drafting their LPA. From a legal perspective, lawyers should also continue to include express instruction in an LPA which should ensure greater certainty. For investment managers, it is prudent to clarify their company's position on any required wording or instruction in an LPA in order to address this with their clients. This will ensure that all the necessary steps are taken to allow the continuation of the management of the fund on a discretionary basis if the client loses capacity.
Molly Hunter
associate, Mishcon de reya
Mental capacity issues and investments under discretionary management: a change in guidance from the Office of the Public Guardian
- MARCUS STUTTARD
The loss of a client’s mental capacity is likely to trigger the termination of the investment manager's terms of engagement.
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Although the OPG's guidance is clear, a prudent donor should still obtain legal advice in relation to drafting their LPA. From a legal perspective, lawyers should also continue to include express instruction in an LPA which should ensure greater certainty.
Russia-Ukraine: BR on AIM in times of crisis
At the time of writing, in early April, Moscow’s bullying tactics in Ukraine have turned into a full-scale assault causing fresh volatility across the financial markets.
Still, the FTSE 100 index is down less than other European bourses, partly because the UK market has a large weighting towards the energy sector and oil giants BP and Shell stand to benefit from the surge in oil prices through $100 a barrel. In addition, as noted by the London Stock Exchange (LSE), “the resilience of our infrastructure has provided certainty; markets have been able to function efficiently throughout the crisis.” FTSE AIM All-Share index, which closed at 1,031.91 on 23 February, the eve of Russia’s invasion of Ukraine, dropped to 963.57, its lowest post-invasion close to date (a 6.62% decline), on 8 March. The market has now regained all the lost ground to close above its pre-invasion close, at 1,055.26 on 4 April, or 2.26% higher.
AIM for protection from inheritance tax
The Alternative Investment Market (AIM) was launched on June 19, 1995 as a sub-exchange market of the London Stock Exchange. The junior market was designed to help small, high-growth companies that are keen on raising capital for expansion. Although many people view AIM stocks as a high-risk investment, the tax benefits that come with AIM investments make them very appealing to a lot of investors. AIM offers investors various ways of taking advantage of government-sponsored tax relief and other forms of loss relief on shares invested in through Venture Capital Trusts (VCT) or that qualify for the Enterprise Investment Scheme (EIS). These highly targeted venture capital schemes provide relief from paying income tax and capital gains tax on direct investment in early-stage companies. Business Relief (BR) operates in a different way, by giving exemption from UK inheritance tax to equity in qualifying business assets held at the owner’s death. Qualifying assets can include investments in unlisted companies and in companies on the AIM market.
In times of heightened market risk and volatility, understanding history can help to maintain perspective. From the past, we know that equity market sell-offs spurred by geopolitical events have typically been short-lived. Over the following 12-month period, returns are largely in line with long-term average returns. So far, market reaction to the invasion in Ukraine is fairly consistent with historical precedent. Indeed, experienced investors in AIM for IHT planning purposes must be having that eerie feeling of déjà vu as they watch the junior market’s performance these days. Everything seems like history repeating itself. For example, at the first Covid-19 lockdown when stocks dropped like dumbbells from a 10-story window, with the AIM market falling 36% in a month. Soon after, the stocks recovered, posting a strong 20% gain, and eclipsing the main UK stock market which remained lower. The AIM market pulled a similar trick after the financial crisis, more than doubling its valuations from the lows. What’s the lesson? Don’t panic because stocks will bounce back. Instead, keep an eye out for bargains. It’s worth remembering that the falls we’re now seeing in stocks are mainly due to fear and uncertainty rather than any fundamental impact on earnings from the crisis.
Déjà vu all over again
While the Ukraine crisis undoubtedly presents challenges to many, if not all, AIM companies, it also provides opportunities. One of the defining characteristics of AIM since its inception is its flexibility and the support provided to fast-paced, innovative businesses. AIM has attracted highly innovative businesses with long-term growth trajectories, from healthcare and pharmaceuticals, to tech and telecoms, and many of these businesses have the agility to adapt swiftly to changing operating conditions. The current burst of interest in AIM funds suggests that investors, eager to back burgeoning businesses through economic vicissitudes, remain willing to explore the market’s potential. With the chaos in markets instigated by Russia’s invasion of Ukraine, investors are still hunting for bargains in the technology sector. Over the last few weeks, only the likes of the defence and mining sectors have managed to keep their heads above water on the stock market. Commodities are expected to be more expensive amid the rising tensions. "The experience of the 1970s suggests that the ongoing war in Ukraine and its effects on commodity prices will reshape commodity markets for years to come," Capital Economics commodities economist Kieran Clancy said in a new report. Clancy argues that elevated prices are likely to lead to some degree of ‘demand destruction’ (i.e., a sustained or permanent decline in demand). Further ahead, he sees a renewed focus on energy independence in Europe and elsewhere, which will have longer-lived consequences for commodity demand and supply. The European Commission has already announced plans to make Europe independent from Russian fossil fuels before 2030, which is likely to accelerate the shift towards renewable energy in the years ahead.
Hunting for bargains
Investing for the long term This requires us to be alert to the many risks we shall see along the way, while maintaining a constant vision of our long-term goals, whatever events are placed in our paths.
Looking for bargain opportunities The current crisis, and the market’s knee-jerk reaction to the erratic events, is creating windows of buying opportunities.
Diversification is the watchword for these times Successful, long-term investors survive short-term falls by sticking to investment principles that have withstood the tests of time. For investment portfolios more broadly, this will include better diversification of your investment holdings. Diversification remains the best way to help usher our portfolios towards the time we shall be needing them to fund our life events.
The AIM market offers tremendous opportunities for diversification. Companies on AIM, from more than 90 countries, are spread across 40 different sectors and 90 sub-sectors. The escalating conflict in Ukraine will continue to have ripple effects across the economy, adding to the stock market’s woes and spooking investors. However, the underlying sentiment regarding the fundamentals of the market and the economy remain optimistic. And BR will continue to help investors pass on more of their wealth, while targeting growth.
FTSE AIM All-Share Index
Source: LSE
Source: Aimlisting
Companies on AIM by sector
1.300.00
1.200.00
1.100.00
1.000.00
900.00
1.056.81
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A ROAD MAP
Utilities Basic Materials Consumer Goods Consumer Services Financials Healthcare Industrials Oil & Gas Technoogy Telecomms
In February, the Treasury’s inheritance tax revenues increased by £700m since last April – making it a record high.
Jessica Franks, Head of Retail Investment Products, Octopus Investments
In times of heightened market risk and volatility, understanding history can help to maintain perspective.
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he UK economy's prosperity after WWII, with well-paid jobs, substantial pensions, entrepreneurial prospects, and property ownership for many, has resulted in the wealthiest older generation in history. The over 50s own more than 70% of household wealth. This wealth has grown steadily over the last 25 years, despite economic downturns, with household net worth rising from £2.8 trillion in 1995 to £11.2 trillion in 2020, a four-fold rise. Unsurprisingly, housing growth has far outpaced inflation and earnings growth over the same period, whilst at the same time pushing further out of reach home ownership for younger generations. The average age of first-time buyers has increased from 26 in 1997 to 33 today, spawning the so-called “Generation Rent”. In turn, increasing rents further limit the ability of younger households to save, making it even more difficult for them to climb onto the housing ladder. When you couple this with a challenging economic and political landscape, with the financial repercussions of COVID to be felt for decades, global political instability, and the threat of East vs West lingering, financial achievement for many of the younger generation lays with the prospect of a greater inheritance. It is predicted that over the next 30 years £5.5 trillion will pass between generations. This is the “Inheritance Economy”. In essence it is an extension of the “Bank of Mum and Dad” which has become the largest ‘lender’ in the UK, particularly to first-time home buyers. Gifting from the older generation during their lifetime is a large part of intergenerational wealth transfers, providing a helping hand to younger family members while also being a cornerstone of estate tax planning - gifts fall outside of a deceased estate for the purposes of calculating IHT if made at least 7 years prior to death. So, what are the challenges for financial advisers? An ageing population, which holds the majority of the UK’s wealth, is set to lead to a rising number of deaths in the coming years. The associated pay-out and reduction of funds under management through large IHT liabilities, and the beneficiaries' requirement for cash, plainly has the potential to dramatically reduce an adviser's funds under management, as well as their client base numbers. However, increasing availability of professional estate planning advice, incorporating the whole family and beneficiaries to enable closer alignment of goals across generations, with a larger probability of generational client retention, offer opportunities to address this. In addition, seeking to reduce IHT liabilities will help the preservation of a higher estate transfer value. This can be accomplished by using a combination of gifting and tax-efficient investment products, many of which give not just lifetime income but also liquidity and access if needed, as well as the advantage of IHT relief. The Inheritance Economy is here to stay, and we must all adapt if the financial services industry is to continue managing wealth through the generations.
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Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
Daryl Thorpe
Partner Zenzic Capital
thought leadership
The Rise of the Inheritance Economy
www.zenziccapital.com 020 3818 9235 zeps@zenziccapital.com
One way to take advantage of the potential created by the emergence of the inheritance economy is to have a stronger interaction with beneficiaries prior to them receiving their inheritance.
Daryl Thorpe, Partner, Zenzic Capital
The increase in wealth in the UK has been remarkable in recent decades, with total household net worth increasing by a factor of four from £2.8 trillion in 1995 to £11.2 trillion in 2020.
10
emand for renewable energy investments has surged in the past few months due to the uncertainty over oil and gas supplies created by the Russian invasion of Ukraine. Investors believe that governments will look to boost their own energy supplies and reduce their reliance on fossil fuels coming from politically unstable countries. While having a positive impact on climate change, locally sourced renewable energy will also help satisfy the increase in demand for electricity production as the government seeks to decarbonise the economy. Billionaire hedge fund founder Sir Christopher Hohn believes the current energy crisis is a “massive wake-up call” that is going to accelerate decarbonisation and investments by countries. “The whole world should now be focused on seeking alternatives, whether it’s renewables or nuclear or hydrogen or synthetic fuels. Suddenly all of these things are far more economic,” he recently told the Financial Times. ProVen, which has a specialist focus on solar energy investing through its estate planning service, has certainly found there are attractive opportunities for investors in the UK. At ProVen, we continue to see a strong pipeline of high-quality assets with secure cash flows that can provide investors with an opportunity to grow their capital or receive an income through dividends. This is particularly important currently with inflation hitting levels not seen for thirty years. The ProVen Estate Planning Service (PEPS), which Beringea manages alongside its lengthy track-record of managing the ProVen VCTs, offers investors the opportunity to access an established portfolio of four UK trading companies with more than £90m in assets and at least five years of proven performance behind them. The four trading companies of the PEPS follow two core investment strategies: secured lending to SMEs and UK solar investment. A high proportion of revenue within our solar-focused trading companies comes from index-linked government subsidies, meaning we can offer investors reliable returns. These returns are targeted to be at least 4% after fees and costs but have been more than double this over the last twelve months. These returns can be paid in the form of dividends, which investors can either use as income or to make gifts out of income to their loved ones. All of this is done while maintaining our core objective of mitigating IHT, as we invest in companies expected to qualify for business relief. To achieve the Government’s target of net zero by 2050, analysts estimate that electricity production from solar assets in the UK needs to double by 2030 and double again by 2050. This will require significant investment – projected to be over £15 billion in today’s money. Meanwhile, a 90 per cent fall in the cost of solar modules has lowered the cost of solar energy production below the cost of using fossil fuels and removed the need for government subsidies. The reliability of the technology, the low capital cost, together with our expertise as an asset manager in developing and operating solar assets mean that we are well placed to continue to grow in the subsidy free era. Solar is clearly a key part of the UK’s net zero strategy; it is a cheap, clean and potentially an endless source of energy, with a proven model for commercial production at scale. At the same time, geopolitical events are accelerating investment and have pushed up the short- and medium-term value of renewable energy assets as countries seek alternatives to overseas-produced fossil fuels. There is no doubt the UK’s renewable energy sector is in a strong position for growth over the coming decade and provides an exciting opportunity for investors.
D
Andrew Webster
investment director Beringea
The renewable energy opportunity for investors looking for both capital growth and income
www.beringea.com 0207 845 7820 info@beringea.co.uk
BR products with an established focus on UK solar that benefit from high-levels of index-linked Government subsidies, such as the ProVen Estate Planning Service, provide a stable investment with predictable profits and distributable income for elderly savers who are more susceptible to rising costs at a time when rampant inflations is projected to hit double-digits.
Andrew Webster, investment director, Beringea
UK solar assets that derive a high proportion of their income from index-linked Government subsidies provide a substantial hedge against inflation, while generating reliable profits that can be distributed on a regular basis.
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The original intention of BR was to protect small businesses from IHT and ensure that they could be handed on to the next generation intact. Of course, this is still the case today and for many business owners their business offers the perfect shelter from IHT. Most small businesses are outside of the charge to IHT because they qualify in full for BR, subject to the qualifying criteria and the cash and assets held within the business. Nevertheless, excess funds which are not held for an identifiable future use in the business could be treated as excepted assets and excluded from the relief. Businesses cannot simply label excess funds as a buffer to protect against unexpected events without risking loss of BR qualification for some or all of those funds. However, there is an option to invest those assets into BR-qualifying shares. BR also provides an exit solution for business owners that can preserve the IHT relief of their company via Replacement Property Relief. BR investing and qualification requires no medical underwriting as, for example, is required to take out a life assurance policy, and costly legal structures are not necessary, unlike conventional gifts and trusts. However, the investment needs to be actually made (it cannot be in contemplation).
Considerations for Business Owners
time-investments.com 020 7391 4747 questions@time-investments.com
EXCESS CASH/INVESTMENTS: CORPORATE BR SOLUTIONS TO IMPROVE TRADING STATUS
Business property that qualifies for 100% IHT relief includes shares in an unlisted company and a sole trader business or share in a partnership. Some managers offer services that address the issue of excess non-trading assets within a business by setting up a subsidiary company that invests surplus cash into BR qualifying investments. This means that BR and, in some cases, entrepreneurs’ reliefs can be reinstated but the business can still access these funds should it need to (subject to the liquidity of the underlying investments). Certain providers set up a wholly owned subsidiary for the corporate client (e.g., TIME: CTC) and the subsidiary then becomes a partner in a number of underlying LLPs. Other providers operate a structure whereby the corporate client directly becomes a partner in a single LLP. Nevertheless, if any subsidiary is not considered to be mainly trading, it would be treated in much the same way as an excepted asset. The BR would be restricted according to the market value of that investment subsidiary. Care does need to be taken where a partnership/LLP owns an interest in a trading subsidiary as, unless the partnership/LLP itself carries on a trade, no BR will be available. This is because the holding of the shares in the trading subsidiary is by itself an investment activity which does not qualify for the relief.
CORPORATE BR TRADING STRUCTURES
Subsidiaries and Partnerships
Any assets that qualify for BR, can be disposed of and replaced without the need to re-set the two-year holding period to obtain the relief. This means that a business owner can use replacement business property to retire rather than continuing their business, with the possibility that the value of the business could decline. In this instance, the business could be sold and, provided the proceeds are reinvested in BR-qualifying assets within three years, none of the relief is lost.
Selling businesses: Replacement Business Property Rules
Replacement business property is also used to allow a fund manager running a BR qualifying portfolio to switch clients from one AIM or non-AIM stock to another, or clients to switch their strategy from growth to income or to change manager. It is a feature that allows investors a lot of flexibility once they have passed the two-year qualifying period. If a person dies holding cash from the sale of a BR qualifying asset (i.e. before reinvestment) that cash does not qualify for BR. There are some nuances to the timing of this three-year rule: it is in fact more generous than it first appears - BR will apply, providing the ownership periods total at least two years in a five-year rolling period. It is the cumulative period of ownership within the five-year window that counts, rather than an unbroken period of ownership.
Same rules for private clients
Originally published in An Advisers Guide to Business Relief, produced by IP and sponsored by:
BR also provides an exit solution for business owners that can preserve the IHT relief of their company via Replacement Property Relief.
Any assets that qualify for BR, can be disposed of and replaced without the need to re-set the two-year holding period to obtain the relief.
What the managers say
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Sustained property price growth and asset price inflation has pushed up the value of estates, resulting in higher IHT receipts for the government. What does this mean for estate planning clients?
Currently, what’s the average holding period for your BR clients? How does that impact your investment strategy?
Our clients overwhelmingly expect to hold their investments for at least two years and most hold their investment until their passing in order to ensure the investment qualifies for BR.. Investors like the fact that PEPS has a consistent track record of growing by 4-5% a year. We believe this is a competitive return at a time when inflation is rising and investors need to protect the value of their capital. But in cases where a client’s circumstances change, investors are free to withdraw money when they wish (subject to liquidity and 30 days’ notice). We believe in a transparent investment approach - there are no charges or penalties on exit, and investors can access the service monthly. We are able to offer flexibility over withdrawals because both our solar and lending companies have strong liquidity due to receiving regular returns.
Investment Director Beringea
So how are the managers feeling about the VCT market and overall investment market conditions? Here's what they have to say.
The nil-rate band usually rises with inflation, but in the 2021 Budget it was frozen at £325,000 until at least April 2026. With many more people trapped above the inheritance tax threshold, what can be done to mitigate IHT bills?
The problem of “fiscal drag” applies across a range of taxes - for example, thresholds on income tax have also been frozen. The impact for inheritance tax can, however, be much greater as it is levied at one point in time. Some mitigation can be achieved through making small regular gifts to family, friends or loved ones. But the amounts are limited and of course a gift is irrevocable and does not take into account a change in circumstances. The danger is a client gives away money they may need at some point in the future. Larger gifts can be made but these only fall fully outside the inheritance tax net after seven years. Investments in BR qualifying businesses can provide the answer to sheltering larger sums while allowing investors to retain flexibility should things change. This is where clients invest in a private company that qualifies for the relief. A BR investment must have been held for at least two years at the time of death to qualify for IHT relief.
Dominique Butters
Executive Business Development Manager Blackfinch Investments
JESSICA franks
Head of Retail Investment Products Octopus Investments
Household wealth is clearly growing and more families are expected to feel the sting of inheritance tax (IHT) in the coming years. The Office for Budget Responsibility (OBR) estimates the Chancellor will collect £8.3bn from IHT revenues in 2026-27 - a 36% rise on current figures. This means it is more important than ever for clients to take advice on estate planning. Clients with an estate worth more than £2m should certainly give careful consideration to their financial affairs, as individuals with assets above this amount start to lose access to the valuable residence nil-rate band. There are many approaches a client can take to mitigate the impact of IHT - for example, through investments that qualify for Business Relief (BR). An advisor will discuss a range of options with a client. Our own ProVen Estate Planning Service (PEPS) invests in two types of businesses expected to qualify for BR - lending and solar, and we explain these in more detail below.
Stephen Daniels
Head of Investments TIME Investments
It means there are now more estate planning clients than ever before. Those clients that thought they had sufficient IHT planning in place, or felt their estate wasn’t large enough to leave an IHT liability, should review their situation, especially with up-to-date property valuations, to determine the true value of their estate, and where appropriate, take professional advice.
The average holding period for clients that have exited is 2.74 years (as of 15th March 2022). Our investment strategy is to invest in income-generative industries, such as solar and wind renewable energy projects, as well as short-term lending projects. As our inflows are 8-10x greater than our outflows, cash has never been needed to provide liquidity for our clients.
PETs and trusts can be useful for clients who can afford to give away their capital. But for those who can’t, or may not live beyond seven years, another option is to invest into BR-qualifying assets. These become IHT relievable after only two years, provided they are still held upon death. Many clients choose to combine gifting with BR investments.
Frozen allowances and rising estate values mean more estates will be subject to IHT. The latest OBR forecasts suggest HMRC will collect £7.6bn from IHT receipts in 2027, representing a 25% increase on the 2021 figure. It has never been more important for advisers and clients to have simple and effective estate planning solutions available to them.
For many clients the average holding period across both our IHT products is 5+ years. Our investment strategies take a long-term, patient view, so the longevity of our investors works hand in hand with that. The longer investor holding periods also helps us confidently forecast the liquidity requirements for our products, which we know is really important for investors in BR products.
average age of investor (at investment) in our BR services has been trending younger. Starting the planning earlier offers many benefits, but it usually means gifting and trusts become less attractive because it’s harder to forecast the client’s future financial needs. This is where BR can be used to begin mitigating IHT, while providing investors access to their wealth and the opportunity for growth.
The family home often makes up the bulk of a client’s estate and with both the NRB and RNRB allowances frozen until April 2026, rising property values across the UK will inevitably mean more clients’ estates will be pushed over the threshold into paying IHT. We see this as an area where financial advisers can add real value, using their expertise to help clients navigate through the difficult and often emotive subject of estate planning. We would therefore expect this to drive more clients to discuss estate planning options with their advisers and increase investment into specialist BR services, where suitable.
Our average holding period is just over four years for our asset-backed BR service, TIME:Advance, and around three and half years for our TIME:AIM service. Our investment strategy aligns with the expected holding period of our investors. We are long-term, buy and hold acquirers of asset-backed projects which target predictable income streams. We avoid short-term investments and/or projects which require market volatility to achieve capital gains.
Financial advisers are always best placed to discuss the most suitable option for their clients. BR can be a great option as it is typically faster than other IHT mitigation routes; investors holding qualifying BR shares can achieve 100% IHT relief after just two years. BR can also prove more flexible as the shares can be held by clients with an active power of attorney and there are no age or medical restrictions.
The significance of diligent estate planning to minimise the IHT payment for future generations is underscored by the rise in property and asset prices, which has pushed many more estates beyond the nil-rate band as a result. With so much wealth invested in illiquid property assets, beneficiaries are also at risk of having to go through a protracted asset sale process just to make the IHT payment if they don't plan ahead.
Make a WILL Make GIFTS – i.e. 7-year rule and gifts out of income Use ALLOWANCES - residence nil rate band (RNRB) Use EXEMPTIONS such as gifts to spouses and annual exemptions BUSINESS RELIEF qualifying investments – exempt from IHT after 2 years Establish a TRUST – several options available Take out appropriate LIFE ASSURANCE Maximise PENSION benefits
So how are the managers feeling about the AIM market and overall investment market conditions? Here's what they have to say.
Market composition Fees and Charges MICAP Market Snapshot Case study: Transfers benefitting from relaxation of the two-year holding period
Market composition
This section takes a look at the state of the Business Relief market based on the number of offers in the market. Unless otherwise stated, this analysis uses data obtained from the MICAP platform and is correct as of 11 April 2022.
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Business Relief (BR) has come a long way since it was first introduced in the 1976 Finance Act. Over the years, the nearly-five-decade-old relief has saved countless businesses from being sold or broken up to pay inheritance tax (IHT) liabilities. Today the BR market, an established part of the Inheritance Tax (IHT) system, is one of the most valuable tax reliefs available to business owners.
VCT investee companies
66.7%
11.1%
22.2%
A unicorn is a private company valued at $1 billion (£718 million) or more. Worldwide, the growth in the number of unicorns has paralleled the global funding increase for new ventures and tech startups. The term unicorn was introduced by venture capital investor, Aileen Lee, in 2013. The moniker was meant to reflect the particular attributes of a unicorn: something highly desirable, but very difficult to obtain.
Open offers
open offers by investment sector
Growth
15.4%
40.0%
Growth & Income
Capital Preservation & Income
As of 11 April 2022, there were 65 open offers in the BR sector, which is one more than the 64 recorded during our previous analysis in August 2021. This reflects a stable and healthy sector in spite of the major challenges currently facing all financial markets.
BR’s more traditional focus on capital preservation has been challenged in recent years by an increasing number of investment strategies. Growth strategies, in particular, have reasserted themselves, reflecting perhaps greater confidence on the part of managers, but also investors’ insistence on estate planning solutions that don’t sacrifice returns. Currently, Growth and Capital preservation & Growth are tying for first place at 40% of open offers. Income strategies, for the remaining 20% of offers, is also an important focus area, not particularly surprising if one considers that many BR investors are also retirees.
Investment strategy
The average target return could be in recovery mode after a steady decline since the beginning of the pandemic. The average target return now stands at 4.34%, nearly a 30% jump from the 3.34% recorded last August.
Target return
Average target return
January 2020 July 2020 May 2021 August 2021 April 2022
4.31% 4.14% 3.88% 3.34% 4.34%
By looking closer, we can see variations of the target return by investment strategy, ranging from 3.96% for capital preservation & growth to a hefty 9% for growth & income. This is, of course, an inflation-beating return. The UK’s Consumer Price Index was 115.8 for the month of February 2022. The inflation rate year over year is 6.1% (compared to 5.4% for the previous month). Inflation from January 2022 to February 2022 was 0.8%. As we noted in our analysis last August, the most common target return has remained unchanged for a number of years at 3%, the same level it is at today.
AVERAGE
4% 3.96% 5% 9%
TARGET RETURNS OF OPEN OFFERS BY INVESTMENT STRATEGY
Capital Preservation & Income Capital Preservation & Growth Growth Growth & Income
There are 10 open offers (25.6%) following the growth & income strategy. The target returns range from 8% to 10%.
AIM Vs. Non-AIM
Of the 65 open BR offers, 35 are AIM-focused and 30 invest in private companies. Perhaps, the stellar performance of London’s junior market in recent years accounts for the tilt of the balance in favour of offers that are geared towards the ambitious growth companies on the Alternative Investment Market. On the other hand, the UK boasts scores of dynamic unlisted companies that operate under the radar of most investors. For BR managers that are able to ferret out such businesses, the rewards can be enormous.
Percentage
53.8% 46.2% 100%
AIM Listed Asset-backed tOTAL
OPEN OFFERS BY INVESTEE COMPANY TYPE
35 30 65
NUMBER
Capital Preservation & Growth
Today the BR market, an established part of the Inheritance Tax (IHT) system, is one of the most valuable tax reliefs available to business owners.
Clients love that they are helping the UK economy by investing into BR-qualifying investments, while also saving tax for their beneficiaries. It’s a win/win.
Dominique Butters, Executive Business Development Manager, Blackfinch Investments.
Fees and charges
Business Relief (BR) is one of the most important reliefs from inheritance tax (IHT). As with all investment products and services, it comes with fees and costs. This section offers a brief overview of the associated fees and charges.
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The VCT fundraising season got into full swing in September and was a time of several rounds of impressive fundraising. During the pandemic and at a time when the UK’s young companies have needed it most, the VCT sector has raised £685 million for investment in small, innovative UK businesses. Where reported, open VCT offers target an average £1,000,000 in fundraising, less than the historical average minimum fundraise of £2,400,000. Whatever the reason, lower fundraising targets bring in more investors. That is what happened last year, when a 7.5% drop from the previous year allowed the most popular offers to be filled well in advance of the end of the tax year. Overall, 13 of the year’s 22 offers (comprising 20 of the 30 individual VCTs raising funds) were fully subscribed before 5 April 2021. Much of the investment went to support healthcare, science and technology businesses which have helped in the battle against coronavirus, said the AIC. “It demonstrates that demand for VCTs and the benefits they bring investors remains high at an extremely difficult time,” said former AIC boss Ian Sayers.
It’s interesting that, since last August, while the average target return has gone up (by nearly 30%), the total average initial charge has gone down (0.81%). As we noted back then, some managers do not charge an initial fee, but do have an initial deal fee for the acquisition of the shares in the underlying companies. This latter fee (0.45% now, in April) has pushed the average upfront charge to 1.67%--versus 1.65% and 1.7% August and May respectively.
Initial charges (open offers)
Jul-20
Average initial charges
May-21
AUG-21
Apr-22
The average annual management charges have risen steadily inched up during the last couple of years.
2019
Mar-20
JUL-20
0.98% 0.32% 1.26%
0.92% 0.31% 1.18%
0.89% 0.39% 1.25%
0.87% 0.39% 1.21%
For investors For investee Total AMC
Average annual management charges
Aug-21
Apr-21
0.92% 0.36% 1.27%
0.91% 0.38% 1.26%
The table shows that, in relation to AMCs, a greater part of the burden is gradually shifting from investees to investors. Since this is an annual fee, it’s worth understanding how the compounding effect of increasing, repeating fees will impact investor returns.
Average
Income tax band
0.94% 0.29% 1.2% 0.87% 0.39% 1.21% 0.78% 0.15% 0.28% 1.54% 0.45% 0.48% 0.29%
Initial Charge to Investors Excluding Adviser Fee Initial Charge to Investee Company Total Initial Charge AMC Charged to Investor AMC Charged to Investee Company AMC Annual Per Fee Exit Per Fee Annual Per Hurdle Exit Per Hurdle Initial Deal Fee Exit Deal Fee Annual Admin Charge
OPEN OFFERS
Annual management charges (AMC)
The following table is a summary of all charges:
Looking at all the fees, we see that most open offers (95%) charge the total AMC. None charges an annual performance fee, and only 5% charge an exit performance fee, the same for the exit performance hurdle.
26% 36% 95% 0% 5% 0% 5% 33% 13%
TOTAL INITIAL CHARGE TOTAL INITIAL DEAL FEE TOTAL AMC ANNUAL PERF FEE EXIT PERF FEE ANNUAL PERF HURDLE EXIT PERF HURDLE EXIT DEAL FEE TOTAL ANNUAL ADMIN FEE
NUMBER OF OPEN OFFERS THAT CHARGE EACH FEE
10 14 37 0 2 0 2 13 5
Number
The most common minimum subscription for the open offers is £25,000, though it can go as low as £15,000, which makes BR highly affordable for its purpose.
Minimum subscription for open offers
average
mode
minimum
median
maximum
£48,828
Minimum supbscription of open offers
£25,000
£15,000
£200,000
200000 150000 100000 50000 0
None of the open offers charges an annual performance fee.
With UK inflation rising at its fastest rate for 30 years and IHT allowances remaining frozen, thousands more families could face surprise inheritance bills.
Jessica Franks, Head of Retail Investment Products, Octopus Investments.
MICAP Market Snapshot
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Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider BR market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider VCT market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
Market Snapshot
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Where two isn’t always two Inheritance Tax (IHT) relief for business property is an extremely valuable relief for business owners making a transfer of value (i.e., gift) during lifetime or on death. In certain cases, 50% relief is due, but these categories below qualify for the full 100% relief. Property consisting of a business or interest in a business: 100% relief Control holdings of unquoted securities in a company: 100% relief Unquoted shares in a company: 100% relief In short, sole traders, partners in a partnership and shareholders in private trading companies may all benefit from 100% relief. But this is subject to the well-known ‘two year’ ownership test which exists to prevent tax avoidance, where relief is only due if the property was owned by the transferor throughout the two years immediately preceding the transfer. S106 IHTA 1984 is the source for that two-year period. That two-year rule is well understood, but it’s less commonly known that it’s relaxed in three situations. 1) Where the transferor became entitled to the property on the death of another person. 2) Where the property transferred replaced other relievable property, and 3) Where the property transferred had been acquired on an earlier transfer within the two-year period. Not surprisingly, relaxations are rare in tax law! With that in mind, let’s briefly explore each in turn.
Graeme Robb
senior technical manager, M&G Wealth
Case study: Transfers benefitting from relaxation of the two-year holding period
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1) Annabelle and Brian ‘Succession’
Annabelle and Brian were a married couple. Annabelle died four months ago leaving her entire estate to Brian. This included shares in a private trading company that she had acquired 22 months before she died. When an individual acquires business property upon someone else’s death, the recipient is treated for IHT purposes as having owned the property from the date of death. But, in addition, where someone like Brian becomes entitled to business property on the death of their spouse or civil partner, then the survivor (in this case Brian) is deemed to have owned the property for any period during which the deceased spouse or civil partner had owned it (irrespective of how long they have been married). In Brian’s situation that gives rise to a further ownership period of 22 months. In summary, if Brian was to gift the shares, his current ownership period of 26 months exceeds the two-year qualifying period. These rules apply to the replacement property provisions outlined in 2) below but they do not apply to the successive transfer provisions outlined in 3) below. Reference – S108 IHTA 1984
For a period of time, Charles owned a qualifying business interest before selling and replacing it with other business property (HMRC consider that replacing means there was some tangible connection or link between the old and the new). Charles died before holding the replacement property for at least two years. However, the ownership test is satisfied if the combined period of ownership is at least two years out of the five years prior to the date of transfer. To qualify for this relief, both the old and the new must be qualifying business property and the new must be bought within three years of the disposal of the old. If the old asset is less valuable than the new asset, the difference will not automatically be eligible for relief but instead a new two-year period will start on the excess. This prevents an individual purchasing a more expensive asset shortly before death or transfer. If Charles had died after selling the old but before replacing with the new, then business relief would have been lost. Reference – S107 IHTA 1984
2) Charles ‘Replacement’
Deborah died and left shares in a private trading company to her nephew Ethan. Her shares qualified for business relief. Twelve months later Ethan transferred his shares into a discretionary trust. Ethan had not owned the shares for two years but qualifies for business relief. Why? Business relief is available on his gift into trust because there have been two successive transfers within two years, one of which was on death and the earlier transfer qualified for business relief. Tax law instructs us that for these successive transfer rules to apply, either the earlier or subsequent transfer (or both) must be made on death. Reference – S109(1) IHTA 1984
3) Deborah and Ethan ‘Successive transfer’
Business relief for IHT purposes is very valuable, and it is important therefore to understand the qualifying conditions.
Sole traders, partners in a partnership and shareholders in private trading companies may all benefit from 100% relief.
IHT: no longer a tax for just the super-wealthy (was it ever meant to be?)
Paradoxically, surveys suggest that opposition to inheritance and estate taxes is even stronger among the poor than the rich. Now ‘the most hated tax in the country’ is slowly making its way down the income brackets, hitting hardworking families who may have thought of it as the scourge of the super-rich.
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Inheritance tax (IHT) is charged at 40% on the amount by which a person’s estate exceeds a certain value. Your estate is basically everything you own, including your home, any other properties, cars, boats, savings or investments, life assurance policies not written in an appropriate trust and other investments, as well as personal effects such as jewellery. The current boom in IHT is reflected in the soaring tax receipts of Her Majesty's Revenue and Customs (HMRC). Receipts for April 2021 to February 2022 are £5.5 billion, which is £0.7 billion higher than in the same period a year earlier. The tax agency said the record high IHT receipts could be partially attributed to the higher volumes of wealth transfers that took place during the peak of the Coronavirus pandemic, though it is still waiting for the full data in order to confirm this. Other drivers of the upsurge in the inheritance levy include soaring house prices and frozen allowances.
Source HMRC
IHT Receipts and Proportion of UK Deaths resulting in IHT, tax year 2001 to 2002 to tax year 2020 to 2021
- Rupert West, Investment Director, Puma Investments
Source: Office for National Statistics
Property inflation: boosting taxable estate value
Spurred by the limited supply of new housing stock, UK house prices continue to outstrip growth in earnings. Data from Halifax Bank show that house prices reached a record high in January. The price of the average UK home reached £276,759 in January, up £24,500 over the year, and £37,500 higher than two years ago. The rising prices are also linked to the stamp duty holiday and record lows in interest rates in 2021, which enabled buyers to purchase property without having to pay as much extra taxes. As a result, the market has been buoyant, and last year saw the largest increase in house prices since before the financial crash in 2007. This sustained property price growth and asset price inflation has pushed up the value of estates, translating into higher IHT receipts for the government. For homeowners, it means that the value of your home is increasing; it also means that they now need to consider IHT. A recent Freedom of Information request, conducted by financial firm Continuum, exposed that residential properties in the UK make up one-third of the value of assets held by estates that are potentially liable for inheritance tax.
The IHT tax take is increasing, but with planning it doesn’t need to. Clients can invest in the UK economy and reduce their IHT liability at the same time.
Dominique Butters, Executive Business Development Manager, Blackfinch Investments
The current Inheritance tax threshold, the nil-rate band (NRB), has been frozen in value at £325,000 since April 2009 and will continue to be frozen until at least April 2026. All income above that tax-free allowance is normally subject to 40% tax. The residence nil rate band (RNRB) will also be frozen at £2 million until that time. The effect of the frozen allowances is much greater than it may first appear. It means that people who are not currently affected by the IHT will be in the future. For the government, it will generate more IHT in itself as more deceased person’s estates are drawn into paying inheritance tax. To appreciate the true impact of the frozen allowance, remember that without the freeze, the NRB would rise in line with inflation every year. Prior to 2009 the NRB increased annually. Instead, for those who are potentially impacted by IHT, a frozen allowance means an extra amount of tax payable every year, simply because the allowance has not increased. In short, by freezing the allowance, the government has created an increased tax burden on the estate and brought more ‘ordinary’ families within the scope of the inheritance tax.
Fixed nil rate bands: drawing in more ‘ordinary’ families
Total receipts from IHT have increased from £2.7 billion in 2010 to £5.4 billion, according to a review of Treasury documents by The Mail on Sunday. The Treasury is forecast to rake in £7.6 billion a year by 2027. Critics have argued that the government is undertaking a programme of tax by stealth. As a result of freezing the IHT allowances, it is predicted that the government will raise an extra £985 million.
The result: IHT paid by families more than doubles in a decade
Average house price, UK: January 2005 to January 2022
Assets by range of net estate value, tax year 2018 to 2019
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
£m 63,000 58,000 53,000 48,000 43,000 38,000 33,000 28,000 23,000 18,000
2017-18
2018-19
2019-20
2020-21
2021-22
2005 Jul
£m 300,000 280,000 260,000 240,000 220,000 200,000 180,000 160,000 140,000 0
2007 Jan
2008 Jul
2010 Jan
2011 Jul
2013 Jan
2014 Jul
2016 Jan
2017 Jul
2019 Jan
2020 Jul
2022 Jan
£14 £12 £10 £8 £6 £4 £2 £0
£0
£50,000
£100,000
£300,000
£500,000
£1,000,000
£2,000,000
80 70 60 50 40 30 20 10 0
Value of next estate (lower limits)
Number of estates requring a grant of representation (000s)
Value of assets and tax liability (£bn)
Number of estates (RHS)
Securities (LHS)
Cash (LHS)
UK residential building (LHS)
Other assets (LHS)
Tax Liability (LHS)
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t is often the case that an estate that does not have to pay Inheritance Tax (IHT) still must complete an Inheritance Tax return. The IHT400 is a long and complex form requiring significant work and gathering of information to complete. It also must be approved by HMRC before being sent to the Probate Registry to obtain a Grant of probate. This can add cost, and perhaps more importantly time to the process even if no IHT is payable. HMRC uses an Excepted estate system whereby if certain classes of assets remain below a prescribed threshold, the smaller IHT205 form can be used. On this form you can provide estimates and it is sent directly to the Probate Registry, making costs and time taken much lower. To qualify, the gross value of the estate must be below the available nil rate band (amount up to which no IHT is payable. This is currently £325,000 (£650,000 for a surviving spouse who can use their late spouses unused allowance). In addition, certain conditions must be met. These conditions relate to categories such as assets held in trust, foreign assets, lifetime gifts. If any of these categories exceed a prescribed threshold, even if the estate is not liable for IHT, an IHT400 must be completed. HMRC announced that for deaths after 1 January 2022 these thresholds have been increased, ensuring that far fewer estates will be required to complete IHT400. The table below shows the threshold prior to 1 January 2022 and the new threshold from that date.
Paul Mounce
Partner Gosschalks Solicitors
Government streamlines IHT reporting requirements
Further, if an estate is worth more than the nil rate band but considering the spouse/civil partner or charity exemption (any assets passing to those parties is exempt from tax) it would also be exempt, but only if the gross value did not exceed £1million. For deaths after 1 January 2022, the gross estate value must not exceed £3million, a significant increase. It must be remembered that the changes do not impact the rates or levels of IHT payable. This change only relates to reporting requirements. Neither does it remove the need to complete an IHT400 to claim Business Property Relief (BPR) or Agricultural Property relief. As these are both reliefs that must be claimed the revenue have to approve the application and the only way to do this is using the IHT400. However, what it will do is allow many smaller to medium size estates to use a much simpler and faster reporting system. HMRC has also now incorporated form IHT205 into the online probate process so if an estate qualifies as an Excepted or Exempted estate, they no longer complete a form, simply capturing tax information in their probate application.
£150,000 (and held within a single trust) £100,000 £150,000
Assets Held in trust by the deceased Gross value of foreign assets Lifetime transfers
CONDITION
£250,000 (and held within a single trust) £100,000 £250,000
THRESHOLD TO 31/1/21
THRESHOLD AFTER 1/1/22
CASE STUDY
Mr & Mrs Smith have a property held jointly worth £500,000, savings of £150,000 and they own equally all shares in a BPR qualifying business worth £1million. Mr Smith dies and leaves his estate to his wife. No Inheritance Tax is payable but prior to 1 January 2022 Mrs Smith would have completed form IHT400 as the estate is more than £1million despite all passing to a spouse. From 1 January 2022 this would no longer be required as the threshold is increased to £3million. Mrs Smith would make an application for probate and provide the details there. If Mr Smith had left his shares in the family business to his son, a common IHT planning tool to preserve BPR, form IHT400 would have been needed to claim BPR and ensure the shares passed without any tax payable. While it is not sensible to carry out tax planning with an eye on the reporting requirements, if an estate can be structured in a way that avoids lengthy and costly applications it should always be considered. The new rules mean that a lot more estates will fall within the simpler process, saving families time and money when it comes to dealing with an estate after death.
The new rules mean that a lot more estates will fall within the simpler process, saving families time and money when it comes to dealing with an estate after death.
If an estate qualifies as an Excepted or Exempted estate, they no longer complete a form, simply capturing tax information in their probate application.
Manager video content
22
Executive Business Development Manager
www.blackfinch.com 01452 717070 enquiries@blackfinch.com
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Jessica Franks
Head of Retail Investment Products
octopusinvestments.com 0800 316 2067 support@octopusinvestments.com
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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
BR comparison table
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
TIME Investments TIME:CTC (Corporate Trading Companies) is an IHT solution designed to help businesses utilise or reinstate existing BR, allowing them to mitigate their IHT liabilities, potentially immediately. The service holds a 25-year track record and allows business owners to maintain control of their assets, avoiding the need for trusts or to gift assets to obtain relief. The service targets a net return of between 3% and 4.5% p.a., investing into asset-backed businesses. 2011 £4.5 billion £102 million Primarily secured property lending and operational real estate finance. October 1995 N/A N/A 3% - 4.5% £100,000 (£25,000 top up) Yes, on request only and subject to the company having sufficient retained earnings 1 director from TIME and CTC Directorships Limited (a board of independent non-executive directors) appointed to each CTC company Bespoke IHT Service 3.5% + VAT 0.5% (inclusive of VAT) and deferred until exit and only payable from the excess over a return of 3.5% p.a. N/A N/A Target 4-6 weeks but could vary depending on the circumstances
TIME Investments TIME:Advance is a simple and effective IHT solution that uses BR to help investors potentially mitigate their IHT liabilities. The service invests in a diversified portfolio of asset-backed businesses and targets a net return of between 3% and 4.5% p.a. The service has received consistent industry recognition, with multiple wins at both Investment Week’s Tax Efficiency Awards and the Growth Investor Awards. 2011 £4.5 billion £875 million Renewable energy (wind, solar, hydro & biomass), secured property lending, operational real estate finance, self-storage and commercial forestry. February 2013 We currently choose to invest in one company, Elm Trading Limited. 4.19% 3% - 4.5% £25,000 (£10,000 top up) Yes, by regular withdrawal option (no dividends paid) available on a quarterly basis. 4 directors & independent advisory panel of 6 Discretionary Portfolio Service 2.5% 0.5% (inclusive of VAT) and deferred until exit and only payable from the excess over a return of 3.5% p.a. N/A N/A We aim to facilitate a dealing event on a weekly basis every Tuesday and pay out redemptions within two weeks (subject to liquidity).
Sapphire Capital Partners LLP The Zenzic Estate Planning Service (“ZEPS”) is a discretionary service that aims to help investors find attractive, stable returns by investing in shares issued by companies who will deploy the capital in a portfolio of loans to Real Estate Companies secured against real estate assets. 2009 £274.0m £4.3m Secured real estate debt January 2020 2 6.0% 6.0% £25,000 Yes 3 Discretionary Portfolio Service 2.0% 2.0% Yes 10.0% 30 days
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
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
Frozen until 2026: IHT allowances What the Managers Say
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.
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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.
Complicating factors
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.
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.
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:
Using Business Relief (BR) to mitigate IHT liabilities
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.
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.
IHT was not designed for just the super-wealthy
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.
20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65+ years All persons
£10,625 £15,618 £20,169 £23,167 £29,444 £25,673 £28,029 £30,350 £31,750 £35,813 £28,185
Physical wealth
UK: Average wealth per adult
Average wealth per adult
Private pension wealth
Property wealth (net)
Total wealth
Financial wealth (net)
£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
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The field of estate planning is operating in an exciting new era of both opportunities (e.g., ageing of the Baby Boomers) and challenges (e.g., blended families). How do you see the future of estate planning?
Around 1 in 5 people in the UK are now over the age of 65, according to the Office for National Statistics (ONS). Life expectancy is increasing, and as is their wealth thanks to surging house prices. The over-50s hold around three quarters of all housing wealth, according to figures from Savills estate agency. And there are now record numbers of people with properties worth more than £1m, meaning their estate may be liable for inheritance tax. ONS data shows house prices rose by almost 11 per cent in 2021, and are continuing to rise, so we expect demand for estate planning services to grow significantly in the coming years. An effective estate planning service should provide a holistic financial solution that is understood by an individual and their family. We believe the future of estate planning lies with advisers who are able to make use of a range of options to mitigate the impact of inheritance tax. These options may include: Giving financial gifts within the annual IHT allowance Giving gifts out of regular income that qualifies for IHT exemption Putting money or assets into a trust Investments that qualify for Business Relief Equity release, where clients release money from their home
What changes would you like to see the government make to the current IHT rules?
Many people find the residence nil-rate band confusing. IHT is charged at 40% on estates worth more than £325,000 (the nil-rate band). If you own a home, you get a further allowance of £175,000 - as long as you leave the home to your direct dependants (the residence nil-rate band). Spouses can transfer their allowance to each other after death, meaning IHT may only be due on assets worth more than £1m. It would be a big step forward to simplify matters and combine both bands into one allowance of £500,000 per person. At the same time, the simplification of other small gift allowances into an annual allowance of, say, £10,000 would also help.
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Looking ahead, where do you see the biggest challenges and opportunities for BR investment?
The challenge and opportunity for BR advisers is to reach a broader range of clients who may be less familiar with estate planning. The challenge and opportunity for BR managers is to ensure the investments can be explained clearly to their investors, and have the right risk-reward profile. In later life or when issues of capacity are raised, gift and trust-based options become far more complex. At this point, BR investments can provide great benefits as they have the ability to produce reliable, long-term growth and where needed an additional income option. We believe that genuine income paying options are more important than ever with UK inflation currently at a 30-year high. BR is an important tool both to mitigate IHT but also to avoid the erosion of capital at a time of rising inflation, and if necessary can be used to cover essential living costs including the provision for care that may one day be needed. Andrew Webster is an investment director at Beringea, behind the ProVen Estate Planning Service.
jessica franks
Essential! Even with ‘bank of mum and dad’, children are finding it difficult to get onto the housing ladder. And with long-term care costs increasing, clients need to have access to their money should care become the priority. BR-qualifying investments are popular because as well as IHT relief they offer a route to pay for long-term care costs.
We would like gifting and trust rules to be simplified. There is too much confusion around the 14-year rule with PETs and discretionary trusts, and clients often expect IHT taper relief on a gift below the nil-rate band. The unnecessarily complicated reporting procedures of ten-year periodic charges for trusts means more advisers are recommending BR-qualifying investments. Clearly a good thing!
The biggest opportunity for BR investment is that the UK government is focused on achieving its net zero targets and increasing investment into green infrastructure. Of course, almost all trading businesses face the challenge of rising inflation and supply issues, certainly in the short term, and BR-qualifying companies, which all carry out their trade in the UK, are no exception.
Over the next decade it is forecast that £327bn will be passed to the next generation. There is an enormous need for financial advice and the opportunity for advisers now spans across generations. BabyBoomers will need simple and effective estate planning to pass on as much of their wealth as possible, and their beneficiaries will need advice themselves. Increasingly advice will move away from dealing with one client to dealing with multiple family members. Advisers who are best able to incorporate that in their business will flourish.
Consistency and stability of tax rules is essential to aid understanding and provide confidence. The OTS found that IHT is poorly understood, and made welcome recommendations to assist. In addition, HMT concluded that the rules should remain unchanged, providing a really helpful level of certainty for estate planning.
HMT’s recent commitment to the current IHT regime should provide confidence for those wanting to undertake estate planning. As an investment led planning tool, BR provides opportunities and incentives for investors to support companies and sectors that are growing the UK economy as we move out of the pandemic.
Estate planning continues to be very complex and an area where advisers add significant, quantifiable value to the families they work with. We see a growing need for families needing simple, flexible solutions to allow proactive planning that does not restrict access or control during lifetime, and we see advisers seeking planning solutions that can interact with existing plans and allow for incremental planning as families and lives change. We very much see positive impact investment coming more to the fore for families as a focus in their estate planning not just in core investment portfolios.
The IHT rules are complex and would benefit from simplification, providing that this does not increase the IHT costs to taxpayers. The RNRB in particular is difficult for taxpayers to understand and restrictive for some. Increases and simplification to the gifting rules would benefit many and clarification on which, if any, of the many remaining recommendations made by the OTS will be taken forward would be welcome.
With nil-rate bands frozen until 2026, we expect that the need for IHT mitigation solutions will continue to grow. Competition for high quality opportunities in our sectors is high, with a number of international financial institutions having commenced investing in recent years. Nevertheless, due to our longstanding reputation in the market, we anticipate that our trades have sufficient scalability to allow us to satisfy the increased demand we expect to occur.
Estate planning must evolve into a multi-generational strategy that takes into account all family members' ever-changing aims and ambitions, incorporating them along the way. Having mitigation mechanisms in place that also provide the estate owner control, allowing for flexibility and adaptation as the family composition changes, will be crucial.
Further broaden the business relief rules to encourage more investment into qualifying businesses which in turn stimulates economic activity. In addition, implement a ‘certification’ mechanism whereby HMRC will validate that the company or investment qualifies for Business Relief on a regular basis, rather than using the "successful death" method. Investors will have more faith in BR solutions as a result of this.
A change in government policy relating to the rules that regulate BR is the most obvious threat to BR investment. While there are no indications that this will happen, none of us can forecast future policy changes. However, the opportunities for BR investment are to develop capital growth and income producing investments that are sound investments in their own right, with the added benefit of IHT relief, rather than simply being a home for cash that will benefit from BR. This will also help protect investments against inflation, which otherwise will erode value.
Learning objectives
How did you do?
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Covered in Section 2: Market Update
Describe how Business Relief sits within the current IHT landscape
Identify the main developments and news in the Business Relief market
Covered in Section 5: Industry Analysis and Section 6: What’s on the Horizon
Recognise the various factors that will affect the Business Relief market in the coming months
Covered in Section 6: What’s on the Horizon
Describe the types of open Business Relief offers available on the market
Covered in Section 4: Industry Analysis
Evaluate the key fees and charges applied by Business Relief managers
Covered in Section 3: Considerations for Investment
Benchmark current products and providers against each other on key investment criteria
HOW DID YOU DO?
CPD and feedback
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Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
R
eaders of the Business Relief Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to obtain CPD and meet accreditation standards, readers must complete a short questionnaire and provide feedback on the report. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at April 2022 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of shares in potentially Business Relief qualifying companies. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
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