BR November

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n the previous Business Relief update we looked at The Rise of the Inheritance Economy which outlined the importance of, and reliance on, wealth transfer between generations. With gifting becoming increasingly considered as a cornerstone of passing wealth down through the generations, what other challenges does this create for families and financial advisers?

The issue of wealth transfer has always been crucial, but now more than ever, with many wanting, and often needing, to support their children and grandchildren. But the older generations are also much more cautious; society itself is very different and the impact of changing relationship arrangements and break ups cannot be underestimated, adding a great deal of complexity to the decisions to be made.

Differences in work ethic between generations creates further worry. Will the beneficiaries have the financial education to manage their assets? Will they have the tools or motivation to protect and grow their own newly acquired wealth further?
The pandemic has also resulted in a re-framing of life for many, with some becoming less interested in leaving an inheritance, and more committed to living well today - upsizing rather than downsizing, travelling, and making memories with their adult children and grandchildren.

If this wasn’t enough to consider, then add in levels of inflation not seen for a generation, and the end of the ultra-low interest rate environment, and it’s no wonder many have conflicting thoughts as to how best to handle the who, how, why and when of wealth transfer.

Effective inter-generational planning therefore will work best with a longer-term strategy and measures being taken over time. Those making the decisions need to walk a fine line to strike a balance between planning for inheritance tax but also preserving the family wealth, whilst helping their descendants out along the way, and trying to enjoy themselves at the same time! It is a difficult conundrum, but one that can be solved by involving younger generations early on in decision-making and careful structuring with in-built flexibility and control. Understanding the next generations attitude towards wealth and ensuring they have a good understanding of how to protect it can only help too.
So, to ease the challenges and help inform the decision process, some helpful key criteria may be useful to consider:

The Challenges of Wealth Transfer

DARYL THORPE

PARTNER ZENZIC CAPITAL

An estimated £300bn will be passed through generations over the coming decade, growing to £5.5tn over the next 30 years with a large proportion comprised of property.

An estimated £300bn will be passed through generations over the coming decade, growing to £5.5tn over the next 30 year with a large proportion comprised of property.

Review - a crucial first step is to understand the income and assets available to give away is the crucial first step. Future potential needs such as personal care costs should not be underestimated.

Advice - there are many misconceptions and myths surrounding what can and cannot be done so expert professional advice is vital. For example, gifting during a lifetime can be an effective option but how does it inter-play with the other criteria here, particularly education and control? Gifts are subject to the potentially exempt transfer “7 year” rule.

Protection - consider where there are risks for the next generation in having assets and wealth. For instance, the impact of divorce, maturity levels, or attitude to money can all have a greater impact than HMRC.

Generation skipping - if the second generation is still growing the pot then consider providing for the grandchildren and beyond.

Education - wealth rarely comes easily. Nurturing a work ethic in the next generation and instilling a sense of responsibility to future generations goes a long way to countering the risk of "entitlement".

Control - how can objectives be achieved whilst also retaining control and flexibility over wealth. For example, many Business Relief investment products provide an IHT shelter but also allow quick access to the funds should circumstances change.

A 2018 survey showed that almost two thirds of 25- to 45-year-olds expect to receive an inheritance windfall, while a large proportion of the same group are simultaneously struggling to engage with longer-term financial planning.

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.

Daryl Thorpe, Partner,Zenzic Capital

It is worth also remembering that perspectives and situations change over time, so continued discussion and evaluation of goals and objectives are important.

The wealth transfer story is far more complex than meets the eye - there is no one size fits all solution. These challenges though provide opportunities for financial advisers to work with their clients and beneficiaries for the long-term protection and growth of wealth that took so much hard work to achieve. And to ensure that money is available to lend a helping hand when needed, whilst also ticking off the bucket list at the same time!

www.zenziccapital.com 020 3818 9235zeps@zenziccapital.com

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THOUGHT LEADERSHIP

This content was written byPAUL MOUNCE, PARTNER, GOSSCHALKS for the Third edition of Intelligent Partnership's 'An adviser's guide to Business Relief', sponsored by TIME Investments

W

hat conditions need to be met to receive BR?

Considerations for Business Owners

There are three requirements. The property must fall within several prescribed categories of property, satisfy a minimum ownership requirement, and not be caught by one of the automatic exclusions.

A business (such as a sole trader), an interest in a business (such as a partnership share), or unquoted company shares will qualify for 100% BR.  Land, buildings, or machinery owned by the transferor and used wholly or mainly for the purpose of a business carried on by a company that they controlled will qualify for 50% BR.

Tip: It may be worth considering whether a property used by the business would be better being transferred into the business to increase the relief from 50% to 100% although advice should be sought regarding other tax consequences this may have.

If property qualifies it must have been owned by the transferor throughout the twoyear period leading up to the transfer.

Tip: If Business property is replaced by new property that also qualifies, the ownership period can continue.  Even if a business owner does not want to purchase another business there are BR products that can be considered after the sale of a business interest to maintain the ownership period.

Finally, BR will not be available if the underlying business consisted wholly or mainly of prohibited activities such as dealing in securities, stocks or shares, land, or buildings and the making and holding of investments.  For example, a property development business would be likely to qualify for BR, whereas a property rental business where the owner has little involvement in the management of the business is not likely to obtain the relief.

Whether a business consists of ‘wholly or mainly’ prohibited activities will be a matter of fact looking at the business in the round, possibly over several years.

Tip: Holding companies, despite wholly or mainly holding or making investments, can qualify if the businesses within the structure do not fail the prohibited activities test.

Assets used for personal benefit, such as a property or a private yacht, are unlikely to qualify for BR just because they are owned by a company or are cash reserves more than what would normally be required for the company’s normal business trading cycle.

It is possible for parts of a business to qualify for BP while others don’t. For example, a trading business worth £2million with £500,000 of surplus cash may be able to qualify for £1.5million BR despite the cash reserve.

It is important for business owners to consider and regularly review the structure of their business to ensure that they can take advantage of and maximise BR which can prove a very important and financially beneficial Inheritance Tax planning tool.

PAUL MOUNCE

PARTNERGOSSCHALKS

Land, buildings, or machinery owned by the transferor and used wholly or mainly for the purpose of a business carried on by a company that they controlled will qualify for 50% BR.

It is possible for parts of a business to qualify for BP while others don’t.

Originally published in An Advisers Guide to Business Relief, produced by IP and sponsored by:

time-investments.com020 7391 4747questions@time-investments.com

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THOUGHT LEADERSHIP

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           ne of the biggest advantages of investments that qualify for Business Relief (BR) is that unlike with trusts and gifts, BR-qualifying shares are fully relievable from Inheritance Tax (IHT), when held for at least two years and at time of death. However, should the death of the client occur before two years, married clients will pass those BR-qualifying assets to their spouse and the previous period of ownership will count towards the new ownership period.

In cases where the death of the client occurs after two years (and where the BR-qualifying asset is held in single name) it could be gifted to beneficiaries instead of the spouse. This would mean that – provided the second spouse doesn’t need the money – the children can receive part of their inheritance upon the death of the first parent, rather than waiting for both parents to die.

In those instances where the client is bequeathing money to a charity in their will, it is imperative that the will is written to ensure the money is given from the taxable estate, otherwise it could use up valuable tax allowances and reliefs that would otherwise be available to the beneficiaries. For example, if a will stipulates 50% of the estate is to be distributed among the deceased’s children, and 50% given to charity, if written too simply it could use up half of the available IHT reliefs (including BR) and could leave the beneficiaries facing an IHT liability.

Here's a scenario that shows this in practice. A client has an estate valued at £2m, but thanks to £1m of nil-rate band (NRB) and residential nil-rate band (RNRB) allowances, and having the remainder invested in BR-qualifying assets, no IHT should be due on the estate. However, due to some unfortunate will wording, 50% of the client’s IHT reliefs and allowances are used for the 50% charitable gift, leaving only 50% of IHT reliefs and allowances for the children, meaning IHT is payable. This unfortunate outcome could be even worse – the estate could lose all of the RNRB on the family home as it wasn’t specifically left in the will to the direct descendants.

It's important for advisers to consider this potential outcome even in instances where they are not advising clients on BR-qualifying assets. Advisers should also consider checking whether the property  is not being left to a discretionary trust (set up before the transferable NRB came into force) as this would stop beneficiaries from benefitting from the RNRB as the property is not being left to a direct descendant.

It is always worth advisers determining whether a client’s will has been properly written, avoids any potential confusion and is legally valid. This is also a good time to ensure the will is aligned with the client’s wishes, and that they are using all the available tax reliefs and IHT allowances. It’s also a great way for advisers to connect with solicitors, demonstrate their specialist knowledge in the estate planning arena, and build stronger relationships for the future.

Why it pays to take a closer look at client wills

DOMINIQUE BUTTERS

EXECUTIVE BUSINESS DEVELOPMENT MANAGER BLACKFINCH GROUP

it is imperative that the will is written to ensure the money is given from the taxable estate, otherwise it could use up valuable tax allowances and reliefs that would otherwise be available to the beneficiaries.

It is always worth advisers determining whether a client’s will has been properly written, avoids any potential confusion and is legally valid.

blackfinch.com01452 717070enquiries@blackfinch.com

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