Last year I looked at the opportunities Whole of Life policies and Discounted Gift Trusts can offer when it comes to inheritance tax (IHT) planning. This time we delve deeper into Business Relief (BR) and its role in strategically mitigating IHT liabilities. (I recommend you read the first two articles alongside this one.)
Firstly, what is Business Relief?
BR is a valuable exemption designed to encourage investment in trading businesses. When certain criteria are met, it provides relief from IHT on qualifying business assets.
Let’s go back to our example clients, Mr and Mrs Sims: a £164,000 investment into BR qualifying assets could be a game-changer for them. This investment aligns with their overarching objective of gradually mitigating their IHT liability while maintaining control over their wealth.
By carefully selecting investments that qualify for BR, Mr and Mrs Sims can potentially shield a portion of their estate from IHT. This strategic move involves investing in shares of unquoted trading companies, which, if held for a minimum qualifying period, can be IHT exempt.
However, it's crucial to note that BR-qualifying investments carry their own set of considerations. The value of these investments can fluctuate, and the success of this strategy depends on the sustained qualification of the chosen assets for relief. Additionally, the nature of the investments should align with Mr and Mrs Sims’ risk tolerance and financial goals.
Assuming the £164,000 investment qualifies for BR and is held for the required period, it could effectively reduce their IHT liability by the same amount. This means that after factoring in the BR, the remaining tax bill of £64,000 could potentially be mitigated, resulting in a more favourable outcome for their estate.
Summary
In conclusion, the combination of the Whole of Life policy, Discounted Gift Trust, and now a Business Relief investment illustrates a holistic and strategic approach to IHT planning. By utilising these tools in tandem, Mr and Mrs Sims have the opportunity to not only address their immediate tax liabilities, but also navigate the evolving landscape of IHT over the long term.
Initial IHT Liability: £600,000
Whole of Life (WOL) Policy:
- Premium invested annually: £6,000
- Death claim value: £488,000
- Impact on IHT liability: £0
Outcome: The WOL policy, set up for Mr and Mrs Sims, not only provides financial security for their heirs, but also eliminates the IHT liability associated with the sum assured, significantly reducing their overall tax exposure.
Discounted Gift Trust (DGT) Investment:
- Initial investment: £120,000
- Annual withdrawal to fund WOL premium: £6,000
- Immediate IHT saving (discount): £26,880
- 7-year IHT saving: £48,000
Outcome: The DGT investment offers an immediate reduction in IHT through the 'discount' mechanism, followed by substantial tax savings over seven years. The income generated is utilised strategically, covering the WOL policy premiums without adding to the IHT liability.
BR investment:
- Investment amount: £164,000
- Potential IHT mitigation: £164,000
Outcome: By investing in BR-qualifying assets, Mr and Mrs Sims have the opportunity to shield a substantial portion of their estate from IHT. If the investment qualifies, it could potentially eliminate the remaining £64,000 IHT liability, creating a tax-efficient legacy.
Final IHT liability: £0
This multi-faceted approach to IHT planning showcases the power of strategic financial tools. The combination of a WOL policy (£6k a year, funded by DGT), DGT investment (£120k), and BR Investment (£164,000) creates a comprehensive strategy that not only addresses immediate tax concerns, but also aligns with long-term wealth preservation goals. Remember, the effectiveness of these strategies relies on careful planning, regular reviews, and adapting to changes in the financial landscape.
In contrast, an alternative for Mr and Mrs Sims would have been to directly gift a whopping sum of £1.5 million to their children in an attempt to offset their £600,000 IHT bill (calculated at 40%, which equals £600,000). However, such a direct gift strategy comes with its own set of implications, including the immediate transfer of a substantial amount of wealth from their estate, and often clients are sometimes nervous around such planning (gifting large amounts).
This concludes this series, but please get in touch if you’d like to discuss this.