As you probably know by now, if your estate is large enough it will be subject to Inheritance Tax. Fortunately, there are a number of ways you can protect your estate and family from having to pay IHT. Today we are going to take a look at one you may not have heard of before; Business Property Relief.
What is Business Property Relief (BPR)?
BPR is one estate planning option available which could help you to leave more of your wealth to your loved ones. Some businesses listed on the Alternative Investment Market (AIM) and some companies who are not listed on any stock exchange will qualify for BPR.
The BPR exists for economic reasons meaning not all companies qualify for the relief. The main aim is to preserve and support smaller companies who mainly operate in the UK. Therefore, BPR ensures that the money goes to businesses where it will have the biggest impact.
If you chose to invest in qualifying companies, your investments can be passed on to loved ones IHT free when you pass away. The only catch being that you have owned the shares for at least two years and you still hold them at the time of your death. This is much quicker than the seven years you must wait for IHT relief after gifting part of your estate.
Why are these investments IHT free?
Investing in unlisted and AIM listed companies does carry extra risk. BPR is an incentive to encourage investment in these companies giving the companies money to grow and create jobs.
Are there any risks?
As with any investment, you are putting your capital at risk. There is no guarantee you will get back the full amount you put in. In addition, AIM-listed and unlisted shares can be more volatile than those on the London Stock Exchange. You can expect to see them rising and falling more often than your regular investments.
It’s always a good idea to seek professional advice when considering a new investment, especially if there is high risk involved. They can make sure you fully understand the risk you are taking on and can keep you up to date with any changes.
Selling your investment could prove a little tricky
If your needs change, you can request to sell a BPR qualifying investment. It is worth noting that this could take time to do so as the shares can be harder to sell.
How do you know if an investment qualifies for BPR?
Generally, whether a company qualifies for BPR is assessed when HMRC receives a claim from a loved one on a holding in the company. There are some businesses which definitely will not qualify for BPR, which are worth noting:
- Those who deal in stocks and shares
- Those who deal in land and buildings
- Some specific industries like mining companies and non-for-profit organisations.
The value of the relief can be either 50% or 100%, depending on the businesses you have invested in.
How does Business property relief work in practice?
While BPR-qualifying investments are only suitable for investors who are comfortable with the risks, they can help you leave more to your loved ones.
Let’s take a look at some simple examples to help illustrate how BPR can potentially help people with IHT planning:
Investing in regular shares
- You have an investment worth £200,000 in shares on the London Stock Exchange which you have held for 5 years at the time of your death.
- Imagining the total value of your estate is over the threshold, your investment would be subject to 40% IHT
- Your beneficiaries would have to pay £80,000 in IHT on these shares, leaving an inheritance left of £120,000.
Investing in BPR qualifying shares
- You have an investment worth £200,000 in qualifying BPR shares which you have held for 5 years at the time of your death.
- As your investment qualifies for BPR there is no IHT to pay on this part of the estate. Your beneficiaries get the full investment value of £200,000.
- Please note in this example, if the rest of the estate (excluding this investment) exceeds the IHT threshold then IHT may still be payable.
Speak to a professional
As we have just shown, it can be incredibly beneficial to invest in BPR qualifying companies. Other benefits can include greater control of your investment and income options. It is important to bear in mind though that these kinds of investments are only recommended for those who are comfortable with taking on a high level of risk.
To make an informed decision, always speak to your financial adviser before deciding to invest. Especially when it involves a specialist area like Business Property Relief.