Simon Ruthers: The role of business relief in estate planning

Business relief assets can offer an excellent estate-planning solution, argues Simon Ruthers, but advisers need to take time to understand the underlying investment and ensure it meets clients’ risk appetites and aspirations

The government’s take from inheritance tax (IHT) is expected to burst through the £5bn mark this year and to exceed £6.2bn by 2022. According to the latest Office for Budget Responsibility figures, meanwhile, the IHT take is expected to double over the decade to 2022.

This huge rise opens up significant planning opportunities – but advisers need to be aware not all investment-based solutions are equal. While different solutions may look similar, the underlying investments could vary markedly, offering widely different investment outcomes for clients.

Longer-term solutions to protect estates from IHT, such as gifting and trusts, work very effectively but typically need to be planned at least seven years before death. In many cases, however, clients come to their advisers too late for gifting solutions, or want to retain control of their assets during their lifetime.

This is where, alternative estate planning techniques, such as investing in assets benefiting from business relief (BR) come into play. BR assets offer full IHT relief after a two-year holding period. They also have the distinct advantage that the client retains ownership and control over their investments during their lifetime.

This potentially makes them a real plus for clients who expect their financial circumstances to change as they get older – particularly should they require long-term care.

Such advantages mean an increasing number of estate-planning services using BR assets have come to market. But advisers need to pick the right underlying BR investments, if they are not only to provide protection against IHT, but also avoid the risk of inflation eroding capital value over long holding periods.

Let’s start by considering the type of assets that benefit from BR. The idea of business relief was originally introduced to protect family-owned businesses from the risk of being broken up to pay IHT liabilities and, over the years, has encouraged investors to back unquoted trading businesses.

Generally speaking, shares in private trading businesses, or those quoted on the Alternative Investment Market (AIM), benefit from BR, as well as various other businesses interests.

Different investments will have different return attributes, in terms of potential for capital growth or income, while others may be highly illiquid. Advisers must make sure they understand the underlying investment. While many assets benefit from BR, not all will be suitable for IHT planning purposes.

Some BR assets offer index-linked returns, which make them ideal as a longer-term hold for investors who want an inflation hedge as well as IHT protection. Inflation protection is important as clients may start IHT planning in their 60s or earlier and live to a ripe old age. Unless the assets keep pace with inflation, however, the investor could lose as much value in purchasing power as they gain in IHT protection.

Dividend stream

Another issue to consider is whether the asset offers a dividend stream, as many clients may wish to supplement their income during their lifetime. Is there liquidity or a secondary market for the assets? This would mean the investments could be more easily realised, if needed during the client’s lifetime, or on death to distribute to the client’s heirs.

An increasingly popular solution is to invest in asset-backed businesses that have long-term index-linked income streams. These include investment in power generation infrastructure, such as renewables. These assets generally have long-term contacts with energy providers, guaranteeing an income. There is also a very healthy secondary market for these assets from aggregators and institutional income-seekers.

BR assets can present an excellent estate-planning solution for advisers as they offer full IHT relief after two years. Advisers should take care however to understand the underlying investment. Do not assume all BR assets are equally suitable for estate planning purposes. Take time to understand the underlying investment and ensure it meets your client’s risk appetite and aspirations.

Simon Ruthers is business development director at Oxford Capital