Inheritance Tax and BPR

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Inheritance Tax and BPR

You will recall that I have been blogging about various HMRC inheritance tax forms, and last week I also discussed Power of Attorney and the Court of Protection. Today I am high-lighting some planning opportunities that address these issues in a practical way using BPR – or Business Property Relief.

Inheritance Tax (IHT) is the second most resented tax in the UK. IHT is currently payable at the rate of 40% on an individual’s estate which exceeds the ‘nil rate band’, currently £325,000. Estates which comprise a family home and few other assets can incur a large tax liability. There are many options available to those who wish to mitigate their estate’s IHT liability. Trusts and gifting are the most common strategies employed, but both take 7 years in order to be fully effective. For clients who are elderly or unwell, this is often too long a timeframe.

Business Relief, or Business Property Relief (BPR) as it is commonly known, is a UK IHT relief that was introduced by the Government nearly 40 years ago (7 April 1976). It was designed to allow business owners to pass on businesses to beneficiaries without incurring an IHT liability. In 1996, it was made more widely available to private investors and now allows any qualifying investment held for at least two years, and at the time of death, to benefit from 100% IHT shelter. Most unquoted, UK registered companies will qualify for this relief. This two year timeframe makes this form of planning the quickest way of sheltering assets from IHT.

BPR and Power of Attorney

Another area when BPR could be of use is when Power of Attorney (POA) is in place. Take a look at this example.

Mrs Jones is 70. Her son has Power of Attorney (POA) over her financial affairs and due to her poor health, he can make financial decisions on her behalf. Gifting and trust planning may not be possible in this case, because a number of restrictions exist to avoid attorneys abusing their positions. One of the main rules states that attorneys cannot give away access to a donor’s (Mrs Jones) funds, without applying to the Court of Protection for approval. Trust work and gifting both involve a change of ownership and it would be difficult for Mrs Jones’ son to successfully put either in place. It may also be unsuitable given the 7 year timeframe and Mrs Jones’ health status.

Mrs Jones’ son could, however, invest in a BPR qualifying company/a portfolio of companies on her behalf. Since the investment remains in her name, he has not changed the ownership for the funds and since a BPR investment only requires 2 years to become effective for IHT purposes, it may be the most suitable option.

Unquoted companies are usually riskier than those listed on a major stock exchange. Whilst there are a number of risks associated with investing in unquoted companies, many investment companies offer BPR investments that target capital preservation. These investments involve companies with long-term, index-linked and stable cash flows.

Want to know more? just get in touch.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Power of Attorney

Clients will know that I advise everyone to arrange Power of Attorney. Often people believe that because generally older people are the ones who suffer from loss of faculty, only the aged need Power of Attorney. I would suggest that this is a very dangerous assumption to make.

Anyone can find themselves unable to make their own decisions. Being hospitalised due to an accident and being “comatose” would be one example. As society becomes rather better at understanding mental health issues (slowly) this can also result in the need for a Power of Attorney.

In essence, an Attorney is meant to act in your interests, as though they were you. This prevents the stressful and lengthy process of going to the Court of Protection, which, like many State institutions is currently “swamped”.

Protection in Action

A Power of Attorney is rarely overturned, but last month just such a case occurred. On 13th October 2015, the Court of Protection revoked the powers of an attorney who charged his elderly mother expenses of £117,289 for visiting her in her nursing home and acting as her attorney. The attorney applied the daily charging rate that he used when he was a self-employed independent consultant.

The judge made the comment that ‘one would be hard pressed to find a more callous and calculating attorney, who has so flagrantly abused his position of trust’ with Senior Judge Lush adding that ‘charging one’s elderly mother a daily rate of £400 for visiting and acting as her attorney is repugnant’.

Even though the son, Martin is named as the sole beneficiary of his mother’s estate, attorneys must never take advantage of their position or profit from it, apart from receiving gifts where the law allows it.

The law actually states:

“A fiduciary duty means attorneys must not take advantage of their position. Nor should they put themselves in a position where their personal interests conflict with their duties. They must also not allow any other influences to affect the way in which they act as an attorney. Decisions should always benefit the donor, and not the attorney. Attorneys must not profit or get any personal benefit from their position, apart from receiving gifts where the Act allows it, whether or not it is at the donor’s expense.”

When Martin suggested that the appointment of a panel deputy would be a waste of time and money because his mother’s estate is effectively already his. Senior Judge Lush disagreed, stating that, “the panel deputy will, for the first time in eleven years, place Sheila at the centre of the decision-making process, rather than view the preservation and enhancement of Martin’s inheritance as the paramount consideration”.

For more details of the case click here.

Dominic Thomas
Solomons IFA