Inheritance Tax Solutions (ITS)

IHT: Inheritance Tax  

  • Inheritance Tax (IHT) in its current format was introduced in 1986, although in the UK the first recorded tax on a deceased person’s estate can be traced as far back as 1894.
  • According to the professional advice website unbiased.co.uk, more than         £2.7 billion of inheritance tax was collected by HM Revenue & Customs in 2011. This is a staggeringly high amount, especially considering that IHT is one of the few taxes that people can legally avoid paying. Remember, every pound paid in IHT means a reduced estate for the deceased’s loved ones.
  • IHT might originally have been intended to help redistribute wealth from the rich back to the state, but now the Nil Rate Band threshold, which affects who pays IHT, seems a little on the low side. According to the Land Registry of England and Wales, the average house price in the UK is £226,000, but in Greater London that average swells to more than £400,000. So, it’s easy to see how a large number of people will find the value of their estate extending beyond the Nil Rate Band threshold simply because their home has increased in value in recent years.

Why invest in an ITS through WealthMe?

  • WealthMe is one of the leading Inheritance Tax solutions broker and provider of independent research.
  • Market leading discountsOur market position means that we are able to offer our clients some of the best discounts available on charges, making it cheaper to invest with us than going direct or via an Independent Financial Adviser (IFA).
  • Our objective is to offer you the most competitive rate so if you find a better deal elsewhere, then please let us know and we will try to match it.
What is Business Property Relief?

Business Property Relief (BPR) is a tax relief provided by the UK Government as an incentive for investing in specific types of trading companies. It was introduced by the Government in the Inheritance Tax Act 1984, and has since been extended to investments in certain types of unquoted companies (not listed on the main stock market) to encourage investment into this area.

Once assets qualifying for Business Property Relief are held for two years, they are exempt from IHT (providing they are still held at the time of death).

Additionally, BPR solutions allow investors to retain control of and access to their investment.

IHT solutions based around Business Property Relief

BUSINESS PROPERTY RELIEF

By investing in companies that qualify for BPR, investments made through the various Inheritance Tax solutions products are exempt from IHT after just two years (provided the investments are held at the time of death).

The product provider will invest in companies which they reasonably believe qualify for BPR, but they can give no commitment that any such investment will remain a qualifying investment at all times thereafter. The relief is assessed by HMRC on a case-by-case basis at the time of death of the investor, as part of the probate process, and cannot be guaranteed. The proportion of the investment that is deemed to qualify at that time, assuming it has been held for at least two years and is still held at time of death, can be passed to beneficiaries free of IHT. The two-year timeframe commences when HMRC deem the investment has become BPR qualifying, which may be later than the investment date.

To obtain BPR the executors of your estate will need to complete a copy of the probate return form IHT 412 and return this to HMRC.

INVESTMENT HORIZON

These Inheritance Tax solutions are not designed to be held for the short term. Investments in qualifying companies have to be held for at least two years and at the date of death in order to benefit from the IHT relief.

DIVERSIFICATION

The product provider will invest in only a small number of companies (in some cases one single company) and all investments may be in one sector. Therefore, there may be limited diversification which could increase the risk for investors.

Key Benefits

SPEED
Unlike gifts and simple transfers into trust, which generally take seven years before they’re fully exempt from inheritance tax, investments into Inheritance Tax solution products are exempt after just two years (provided the investments are still held at the time of death).

SIMPLICITY
An investment in Inheritance Tax Solution Products does not involve complex legal structures, client underwriting or medical reports.

CONTROL AND ACCESS
Unlike some other inheritance tax solutions, you retain access to your investment. If your circumstances change and you want to access your holding, you can – although money withdrawn will not be shielded from inheritance tax. What’s more, you have the option to take a regular withdrawal from the product or leave any returns within the investment.

INVESTMENTS THAT FOCUS ON CAPITAL PRESERVATION 
These investments are usually a discretionary investment management service. Investors appoint the product providers to invest on their behalf in one or more unquoted companies that qualify under the rules relating to BPR. BPR is a tax relief provided by the UK government as an incentive for investing in specific types of trading companies. In order to manage the risks associated with investing in such companies, product providers only selects those whose business activities are focused on capital preservation, and they look for companies which provide asset backing or have contractual revenues with reliable customers. More information on this is provided in their product documents.

Obtaining HMRC confirmation 

Your executors need to notify the product provider of death and request a valuation as at the date of your death.

The executors of your estate complete form IHT 412 which includes details of your policy, and send this to HMRC as part of the probate process. HMRC review the information and assess whether your investment qualifies for BPR. Once this is confirmed, the value of the investment at the date of your death, is exempt from IHT calculations on your estate.

Options after two years

You have two options once the investment becomes an exempt asset for inheritance tax purposes (ie two years from the date of the original investment into the underlying holdings). Your decision depends on the level of control you want to retain over your investment.

1. Hold the investment
You can continue to hold the investment yourself.
This will give you maximum control and allows you to withdraw all or part of your investment at any time.

2. Put it into a trust
If you are confident that you do not need access to the capital, you might consider gifting all or part of the investment into a discretionary trust. This has a number of potential advantages:

  • You can arrange for the trust to pay you a level of income every year
  • You can determine how the assets within the trust are used (to pay school fees for example)
  • Gifting into a trust prevents the assets being tied up in the probate process
We recommend that you seek specialist professional advice before establishing a trust. 
  
Risk Summary

This type of investment may not be suitable for all investors.
Potential investors are recommended to seek independent tax and financial advice before investing.

Investment risk: as the product providers invests into small unquoted companies capital is at risk and the investment return is not guaranteed.

Liquidity: investments made by the product providers, because they are in unquoted companies, are not readily realisable unlike companies on the London Stock Exchange.

Taxation: rates of tax, tax benefits and allowances are based on current legislation and HMRC practice and depend on personal circumstances. These may change from time to time and are not guaranteed.

Investment performance: there is no guarantee that these investments will achieve their objectives. We can make no guarantee of investment performance or the level of capital gains or income that will be generated.

Diversification: The product providers will invest in only a small number of companies and all investments may be in one sector. Therefore, there may be limited diversification which could increase the risk for investors.

Investment horizon: These investments are designed to be held for the long term, as investments in qualifying companies have to be held for at least two years and at the date of death in order to benefit from the IHT relief.

Business Property Relief: The product providers will invest in companies that they reasonably believe qualify for BPR, but can give no commitment that the such investments will remain qualifying at all times thereafter. The relief is assessed by HMRC on a case by case basis at time of death of the investor as part of the probate process.

Key risks for an Inheritance Tax solution product

  • Usually long-term investments (5-10 years)
  • Risk is to the capital due to inflation
  • Investment into one (or a number) of small unquoted businesses
  • Returns are not guaranteed
  • Liquidity could be an issue
  • Value of tax savings will depend on your circumstances and tax rules can change over time
  • Rates of tax, tax benefits and allowances may change from time to time and are not guaranteed
  • Tax treatment is dependent on individual circumstances and may be subject to change in the future
  • Past performance is not a guide to future performance and may not be repeated
  • The value of shares can go down as well as up and you may not get back the full amount invested
Liquidity

Please check the product provider’s documentation regarding liquidity as they have different options.

Many Investments in these solutions are in unquoted companies, and are not readily realisable, unlike companies on the London Stock Exchange. In the normal course of events most product provider will be able to redeem your investment within one month – but this may not always be the case. If it is necessary to institute a share buy back because of unusually large withdrawals then the process could take approximately three months. In exceptional circumstances (such as a change in legislative framework) where the liquidity within the company is insufficient to facilitate a share buy back, the process could be much longer and the product provider may pay redemption proceeds by instalments.



Free ITS Guide

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All investment decisions must be made solely on the fund's prospectus.

Octopus
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Downing
Foresight