Business relief - Case study

Tom sold his shareholding in his trading business two years ago for £750,000. With no family members interested in taking over, Tom and his wife felt the time was right to enjoy the cash that this provided.

They made gifts of £200,000 from their cash to each of their children 4 years ago. Reducing the Inheritance Tax (IHT) that would be paid from their estate was important. They had taken out life cover for 7 years to cover this gift. Sadly, Tom lost his wife 12 months ago. The policy taken out on his wife paid out the sum assured into trust. Since Tom’s health has deteriorated too.

Tom met with his Albert Goodman Financial Planner to discuss what options there might be to reduce the Inheritance tax that would fall on his estate. Tom was advised that because he owned shares in his company, these may also have qualified for Business Relief (BR). Meaning that the value of these shares could have passed to the children IHT-free, but now he has the equivalent value in cash, the full amount would be subject to IHT, because of the value of his estate.

After discussing with Tom his investment experience and risk and his ability to bear a financial loss, it was felt that Tom might be a client, suitable to consider for an investment that would offer the possibility of benefitting from BR.

Our Financial Planner explained that there is a two-year holding period needed before an asset can qualify for relief. However, Tom owned shares in his business, and where these shares qualified for BR and are sold and reinvested within three years, the money he received from the sale of the shares could regain business relief against IHT immediately.

We advised that BR-qualifying investments are made in the shares of unquoted/qualifying AIM-listed companies. They are regarded as higher risk than a portfolio that would hold assets that are listed on the major stock market exchanges. This higher risk is compensated by the favourable tax treatment of the investment.

Its important Tom understands and accepts that the value of these investments may fall or rise, and that Tom/his estate may get back less than invested.

Application of BR is not guaranteed. It’s assessed by HMRC on a case-by-case basis. Success is dependent upon Tom’s investments meeting the BR qualifying criteria at the time of his death.

Funds remain in Tom’s ownership and are available at any time. However, withdrawals and the timing of these withdrawals, cannot be guaranteed as the asset will be held in unquoted or AIM-listed companies that may not offer the same liquidity, as shares held on a major stock exchange.

If you would like to know more and if this may be suitable for you, please get in contact.

The contents of the article are for information purposes only and do not constitute individual advice. The Financial Conduct Authority does not regulate Inheritance Tax Advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.