Business Property Relief (BPR) was introduced in 1976 in response to the growing number of individuals that were faced with the reality that in the event of their death, the business they had grown and cultivated over many years, may need to be sold or broken up to pay an inheritance tax (IHT) liability.
Since then, the scope of BPR has evolved to encourage individuals to invest in qualifying businesses, enabling them to potentially reduce a large IHT liability for their beneficiaries. BPR can be tricky to understand, so we have put together a guide that should help you build your knowledge on the subject.
Which companies qualify for BPR?
Companies that are quoted on the Alternative Investment Market (AIM) and carry out a qualifying trade. Unquoted, privately owned companies that are not listed on the main London Stock Exchange (LSE) and carry out a qualifying trade also qualify.
What are the benefits of BPR?
If an investor is eligible for BPR, there are benefits for your clients in BPR investing, namely mitigating inheritance tax through companies with predictable revenue streams. For example, investments in companies in sectors such as infrastructure can earn government-backed subsidies for as much as 20 years.
Unlike gifts and trusts, which typically take up to seven years before they are fully exempt from IHT, BPR-qualifying investments are IHT exempt after just two years provided that the investments are still held at the time of death. If the investor was to die before the two-year qualifying period is completed, the shares can be passed on to a spouse or civil partner without having to reset the two-year qualifying period. In addition, qualifying BPR investments can be switched to an alternative BPR qualifying investment without restarting the two-year clock.
BPR planning does not affect the nil-rate band meaning that it can complement and diversify other Trust and Gift based IHT planning that does impact the nil-rate band.
Regardless of age or health condition, there isn’t a requirement for medical underwriting. As there is no age limit for investment into BPR, it can be considerably beneficial for people that feel they have left it too late to carry out estate planning.
Much like all investments, there are risks attached to BPR investments. Whilst the current tax rules provide the above-mentioned benefits, there is no guarantee that this will continue to be the case in the future.
It is important to also remember that if your client does not hold the investment at the time of death, the tax exemption will be lost. Also, companies may change their BPR qualification status over time which could, in turn affect an investor’s entitlement for relief.
On top of that, investing in the companies typically listed on AIM or unlisted companies are inherently more risky as these companies may not perform as hoped, and in some circumstances may fail completely. Unlisted companies are also are less transparent and less easy to value. As a result, investor capital is at risk and they may not get back as much as they put in and in the worst-case scenario they could lose all their capital.
BPR investment should be considered as a longer-term investment and may be higher risk and more difficult to realise than other securities listed on the London Stock Exchange.
Who could benefit from BPR investing?
There are a number of different scenarios in which a client could benefit from BPR investing. As a general rule, BPR investing is attractive for clients who want to shelter their assets from inheritance tax.
Other scenarios where BPR investing may be applicable are listed below:
- Clients who have a power of attorney in place and wants to mitigate inheritance tax
- Clients who have sold their business within the last three years and are looking to avoid paying inheritance tax on the sale of their business
- Clients who have loan trusts and are concerned about the inheritance tax due on the initial capital
- Clients who would like to put more than the nil-rate band into a discretionary trust
- Clients who are looking to set up a family investment company with inheritance tax efficiency
- Clients who hold cash and are looking for a better rate of return
- Clients who are deemed a non-domiciled individual looking to meet capital requirements when applying for UK residency via a Tier 1 Investor Visa could benefit from BPR investing.
Investment Advisers should look at the individual circumstances of the potential investor to determine whether BPR investing is suitable for their clients.
Foresight Group LLP is regulated by the Financial Conduct Authority and does not provide investment or tax advice. Therefore, potential investors should seek specialist independent tax and financial advice before investing. BPR investments are long-term investments and your client may not be able to get their money back out before the end of the investment term.