With the freeze on the Nil Rate Band until 2015, Inheritance Tax (IHT) is back on the agenda for lots of individuals. If you have heard of Enterprise Property Relief (BPR) but do not own a company you would be forgiven for assuming it wasn't some thing you could use. In fact BPR may be employed to mitigate IHT by individuals that don't own a organization.
BPR was introduced by the Treasury to allow business enterprise owners to pass on their family firms without paying IHT on any assets held for a minimum of two years. Nevertheless, investors in assets for example portfolios of Option Investment Marketplace (AIM) stocks and also the Enterprise Investment Scheme (EIS) can also qualify for BPR.
Q: Just how much risk is involved in BPR assets?
A: Investing in AIM shares usually entails far more risk than investing in quoted shares. BPR qualifying firms have been created that use less risky company trades that are backed by insurance and which focus on preserving your capital instead of growing it, which can make them much less volatile than other AIM businesses, but they are still considered to be high risk.
Q: I thought ISAs the most tax efficient investment?
Once you've got moved from accumulating assets to protecting them it may be worth moving your ISAs to BPR investments to prevent IHT. The reason for this is that whilst ISAs are free of charge of Income Tax and Capital Gains Tax they're not free of IHT. Having said that, tax just isn't the only consideration and you must also look at the possible differences in liquidity and risk.
Q: What occurs if my spouse dies prior to the 2 year qualifying period ends?
A: Passing BPR investments from 1 spouse to one more doesn't restart the two year clock, so if a husband owned them for a year and died and left them to his wife, and she died a year later, the assets would still be IHT exempt as long as they stay in BPR qualifying assets.
Q: I am in poor wellness or in my nineties. Will underwriting are going to be a difficulty?
A: There is certainly no underwriting needed so it can be employed regardless of your age or well being situation.
Q: Is it too late if I have already sold my business enterprise?
A: To qualify for BPR you need to have owned qualifying assets for 2 years inside the last 5 years and own them at your death, but the assets do not need to be the same so long as they all qualified. So in the event you sold a enterprise or AIM shares 2 years ago which you had owned for 2 years, you can location the proceeds in an additional BPR asset now, and they will be IHT exempt right away.
Q: Can I avoid Capital Gains Tax (CGT) as well as IHT?
A: When you have paid CGT on the sale of a enterprise or other asset inside the last three years, the proceeds could be reinvested into EIS assets so the CGT may be reclaimed and not paid until the EIS is sold. This means if the EIS is held until death, the CGT will by no means have to be paid as the liability dies with you. EIS investments can also benefit from 2 year BPR IHT exemption.
Q: Can a Power of Attorney (POA) use BPR?
A: BPR investments have to be held in the owner's name, so there's no relinquishing of assets which makes them suitable for POAs.
Q: Can BPR help minimize the IHT payable on my household?
A: When you have capital tied up inside your house above the Nil Rate Band worth, it is possible to use an equity release mortgage to release cash to invest in a BPR asset. However this could have significant downsides if the worth of your BPR investment was to fall compared with your outstanding debt.
Q: What if I have previously invested in a trust to reduce my IHT?
A: If you have invested in a loan trust inside the last 10 years it is doable that you will have had small or no investment growth and thus little or no IHT saving. One choice you might have would be to cancel the loan trust and invest the proceeds into BPR assets.
Q: What pitfalls really should I watch out for?
A: AIM shares aren't generally as liquid as significant corporation shares so you might not have the ability to realise your investment as rapidly as you would having a mainstream investment. The schemes that focus on capital preservation tend to invest in 1 firm and as such do not supply diversification between diverse shares which makes them high risk compared with a diversified portfolio of shares.
Summary
Whilst BPR assets do potentially involve high level of risk and less liquidity than mainstream investments; to some extent they do have the possible to allow you to have your cake and eat it by saving IHT whilst at the same time giving you access to your money and doing so without the usual risk level of AIM shares. They are certainly worth a closer investigation.
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