The challenge of preserving wealth

When selling a business and receiving substantial amounts of cash, the question arises as to how best to invest these proceeds, but the Inheritance Tax (IHT) consequences of the business disposal are often overlooked. If a business was not wholly or mainly involved with investment activities then it may well have qualified for Business Relief (BR, formerly known as Business Property Relief or BPR) meaning that should the owner have died, whilst owning their business, it should have benefited from 100% exemption from IHT, provided that the client in question had owned that business for two years. However, as soon as a client disposes of their business the benefit of this IHT exemption is lost.

What this generally means is that many exiting business owners have meaningful IHT exposures, which they previously didn’t have by their wealth being tied up in their BR qualifying business. This may seem like a difficult problem to solve and often clients simply give away their wealth at this point and wait for seven years to pass to avoid IHT.

An alternative solution

However, there is an alternative and often overlooked solution. Clients can continue to avail themselves of this attractive relief by reinvesting the proceeds (or some of the proceeds) into other BR qualifying investments. Provided that the proceeds are reinvested within three years of the disposal, the client should be able to benefit from ‘Replacement BR or RBR’, i.e. they do not need to have held the new BR qualifying investment for the two immediately preceding years for it to be exempt from IHT. Furthermore, and perhaps of greatest importance, business owners are not having to part with their wealth to protect their estates from IHT because it is their investment, which they can redeem should they need the cash or should they wish to start a new business. An important point to emphasise here is that, although, the client may well have three years to benefit from RBR, their cash is exposed to IHT up until the point that it is reinvested, so many advisers are learning the importance of talking to their clients about reinvesting their proceeds well in advance of completion of the sale.

Despite this, there remain numerous associations with BR qualifying investments and AIM portfolios or even death bed planning (in the absence of other viable alternatives since the clients in question are unlikely to survive seven years) the former of which often equates to a notoriously volatile investment and the latter of which suggests that BR qualifying investments are nothing but a last chance saloon at saving IHT. However, these associations are not always accurate.

There are many BR qualifying investments, with meaningful and compelling track records that set out to primarily preserve capital and deliver steady growth and it is these investments that are becoming increasingly popular with exiting business owners who wish to preserve their IHT exemption via a relief that they are already familiar with.

To summarise, BR is becoming increasingly popular as an estate planning tool as people come to realise that, amongst other things:

• passing on your life savings tax efficiently whilst utilising BR does not necessarily equate to investing in a volatile share portfolio;
• exiting business owners can continue to avail themselves of this attractive relief; and
• perhaps most importantly of all, they do not need to part with their wealth to mitigate IHT.