Control, flexibility and paying less tax often become financial priorities when you start thinking about inheritance tax and how much your family is going to be liable for. Is it possible to achieve all three or is that just wishful thinking?
What is your inheritance tax-free allowance?
Everybody has something called a nil rate band (NRB) for inheritance tax purposes. This is the amount up to which your estate has no inheritance tax to pay. For 2019/20, the nil rate band is £325,000 plus there is the potential of the recently introduced residence nil rate band (RNRB). This RNRB potentially gives an extra £150,000 tax allowance. This means a total tax allowance of £475,000 per person in 2019/20, providing the RNRB qualification criteria is met. There are of course a host of rules and regulations surrounding the RNRB however, we’ll explore those another time!
If the value of your estate exceeds your nil rate band when you die, your family are likely to have to pay inheritance tax on the excess amount. The current rate of inheritance tax is normally 40%.
The value of your estate means the total value of your worldwide assets. Virtually everything you own, anywhere in the world is considered part of your estate. This may include any property, ownership of a business and/or any share of a business.
So, if you are married or in a civil partnership you will have your nil rate band allowance of £325,000, plus potentially your main residence relief of £150,000; your spouse/civil partner will also have the same. If your spouse dies before you, then you can inherit these allowances. This means your inheritance tax-free allowance becomes £950,000 (in 2019/20).
Assuming your estate is worth below £2m and your main residence is passed on to a direct descendant when you die, your joint allowance could effectively rise to £1m. This is because the increase in the RNRB has been staged since 2017. It’s currently £150,000, but it will rise to reach £175,000 by 2020/21 and will increase in line with the consumer price index thereafter.
Good news – yes? The fact remains that many estates increase year-on-year at a rate faster than the inheritance tax thresholds. The tax your family has to pay on anything more than your nil rate band is certainly a hefty one, but there are ways you can reduce it – both traditional and not-so-traditional ways.
Reducing your inheritance tax bill: Some options
Many of the more traditional estate planning solutions centre around either giving away your money or putting it somewhere you can’t access it.
For example, if you give away your assets to family and friends during your lifetime, you must live for at least another 7 years before they become exempt from inheritance tax. Similarly, putting assets into a trust can also take 7 years before their value falls outside of your taxable estate.
Giving away your hard-earned money and investments during your lifetime isn’t always a very attractive option – for one, it’s money you may need or want yourself to pay for your long term care (LTC), or more importantly, being able to decide where you want that LTC to be. What other inheritance tax-efficient routes are there?
Business Property Relief: An alternative option
A less conventional way to reduce your inheritance tax bill is through Business Property Relief (BPR). Many have never heard of BPR and yet it:
- Gives you control of your money and
- Moves it out of your estate for inheritance tax purposes in only 2 years (not 7 years)
What exactly is Business Property Relief?
To start with you do not have to own a business to take advantage.
Business Property Relief (BPR) is an established form of tax relief that incentivises you to invest your money in trading businesses. Shares in a BPR qualifying business can be left to your beneficiaries inheritance tax-free, provided they have been owned for at least 2 years at the time of your death¹.
Now I’m not suggesting that you race out and invest in a local business. However, there are investment vehicles that utilise BPR and this can be a viable inheritance planning route to examine with your financial adviser.
Here’s a brief, simplified example
Dr. Jones knows he will use up his inheritance tax allowance of £325,000 plus his additional residence nil rate band. He has an existing investment portfolio of £200,000 and accepts the fact that his estate will get an £80,000 inheritance tax bill on his investment portfolio when he dies.
Dr. Saway will also use up his nil rate band and his additional main residence allowance. But, unlike Dr. Jones, Dr. Saway has looked at the pros and cons of Business Property Relief and decided to move his investment portfolio to a BPR qualifying investment. As he lives the required 2 years, provided that his BPR investment portfolio is still held at the date of death it will not be subject to inheritance tax when he dies (Saving £80,000) on inheritance tax.
Should you be considering Business Property Relief?
Business Property Relief has a wide appeal, including for those who:
- Want to keep control of their money and perhaps have existing investments
- Are acting as Power of Attorney for someone who has investments
- Are thinking of setting up a discretionary trust more than the nil rate band
- Are selling a business or who have sold a business in the last 3 years
- Are worried about being elderly or in poor health but don’t want to give up capital for the future.
For anyone of the above reasons, investing in BPR qualifying businesses could well be a route you haven’t thought of or heard of before, and yet the savings can be great.
You should keep in mind:
- As you would expect, there are costs and charges associated with BPR schemes and indeed, the schemes themselves are designed for experienced investors who can accept a significant degree of risk.
- They don’t suit everyone’s appetite for risk and you must explore the details and take financial advice before you take any action.
- That the value of an investment may go down as well as up, and you may not get back what you originally put in.
- Tax rules may change in the future, and the value of tax reliefs depends on your circumstances.
- You should be prepared to hold the investment for the long term (until death) as any capital withdrawals taken from the investment will no longer qualify for BPR, and will lose their inheritance tax exemption.
Interested but need some guidance?
Legal and Medical have exercised extensive research to satisfy their/our stringent due diligence criteria, and have identified BPR schemes that we would be happy to discuss with those who are interested in exploring this area further.
If you’re a successful doctor or dentist or have parents whose estate could be subject to inheritance tax, you owe it to yourself and your family to fully explore all your inheritance tax planning options. That’s my view anyway!
Would you consider Business Property Relief to help reduce inheritance tax? Let us know by adding a comment below.
¹ Gov.uk
Disclaimer
This article is provided for information only. The information contained in this article does not constitute financial advice. This information is based on our current understanding of the legislation. Legislation and tax treatment can change in the future.