Business Property Relief is a statutory relief that provides 100% relief from Inheritance Tax for investors who are holding shares in qualifying businesses (and have done so for at least two years) upon their death. A number of investment managers offer consumers investment solutions that benefit from BPR.
Research carried out by Intelligent Partnerships’ for the forthcoming 2016/17 BPR Industry Report has found that advisers’’ use of BPR qualifying investments in estate planning strategies is on the rise with 77% of the advisers Intelligent Partnership surveyed expecting that their use of BPR will either increase or stay the same over the next two years. Here are seven key drivers behind this trend:
- The Housing Shortage
House price inflation is set to continue to increase IHT liabilities,in spite of the Residence Nil Rate Band (RNRB): From 2009 (when the nil rate band was frozen) to 2015/16, the House Price Index for the South East rose 30% and by 52% for London (ONS). In the same period, the total CPI (which excludes house prices) increase was just 21%. This has pushed up estate values so that many more are piercing BOTH the nil rate band AND the new residence nil rate band (to be introduced from 2017/18). The RNRB is likely to reduce the 45,000 death estates caught by IHT in 2016/17 by a third. However, the reality is that any reduction is likely to be short-lived. Projections for IHT collection for the four year RNRB phasing in period, show the percentage of death estates liable dropping in the first year and then climbing again, whilst the monetary value continues to rise during the whole period. Moreover, after the phasing in period, the RNRB will only be increased by CPI. So, as housing shortages continue to drive up property values, estate values are likely to climb at a higher rate than CPI, thereby drawing more people back into the scope of IHT.
- More Reforms
New rules set to come in in 2017 are likely to catch more estates in the IHT net: From 2017, rule changes regarding non-doms will bring their UK residential property into the scope of IHT (no matter whether it is held directly or indirectly) and reduce the amount of time they can be resident in the UK before becoming liable to the tax. Additionally, the five million UK ex-pats will need to re-check their inheritance tax status as tighter regulations governing their UK domiciliation for tax purposes will apply.
- Pension Freedoms
Funds that go into drawdown may increase the value of estates. Latest figures show that, since the implementation of pensions freedoms last year, £6bn has been withdrawn from pension funds. IP’s provider survey shows that 79% of BPR investment managers see this as a positive, because they see BPR qualifying investments as the perfect home for some of those funds, where they can earn a better return whilst mitigating IHT.
- Low Interest Rates
The low interest rates and low inflation levels look set to continue. The low risk profile of capital preservation has historically resulted in BPR products offering relatively low returns. This can be a problem if bank rates start to look more appealing, or if funds don’t grow in line with inflation. The good news for BPR investment providers is that in March 2016, the Office for Budget Responsibility concluded that, “the market now believes that Bank Rate is more likely to fall than to rise over the next two years and that it will only reach 1.1 per cent by the end of the forecast period [2020/21].”
- New BPR qualification for Entrepreneurs Relief : Many clients holding BPR-qualifying investments will hold them until death (at which point no CGT is chargeable) as required to meet the IHT relief criteria. However, new rules allowing a 10% rate of capital gains tax on newly issued shares in unlisted companies (provided they are held for a minimum of three years) could increase demand for BPR products; They will become more tax efficient when withdrawals are made, for example to pay for care costs.
- Higher returns broadening the appeal of BPR Investment: In spite of the traditional focus on capital preservation, there is a now marked increase in the number of strategies available for BPR investment. A new focus on growth and income in recently launched BPR products has raised the average target return from 3.97% to 4.26%, reflecting the demand for estate planning solutions that don’t sacrifice returns.
- Increase in dementia: This is set to double to 1.6 million by 2040, which represents over 30,000 people a year. The lasting powers of attorney this is likely to generate are particularly obstructive to estate planning as they require that all but the smaller gifting decisions go through the court. BPR investment decisions, on the other hand, can be made by the attorneys without court permission.
Although the short term effects of the RNRB and and the potential use of pensions as IHT-efficient vehicles following the abolition of the 55% pension death tax may present challenges, the outlook for the BPR industry looks very robust.
More details can be found in the 2016 BPR Industry Report. The report follows up Intelligent Partnership’s 2015 Report which was the first of its kind to bring together BPR research, analysis and information for an adviser audience. The 2016 version looks at recent developments in the sector to give an overview of the BPR market that’s current, relevant and easy to read.
Complimentary copies of the Report are now available for download on Intelligent Partnership’s website intelligent-partnership.com
- Although the new Residence Nil Rate Band is set to reduce the number of estates caught by IHT from 2016/17, that reduction is expected to be short-lived and the number of families affected will be on the rise again by 2020.
- Only 14% of adults know what the current IHT threshold is, and almost a third of homeowners aged 70+ haven’t considered IHT mitigation.
- 77% of advisers think that use of BPR will either increase or stay the same over the next two years.
- The average annual return BPR products target has increased to 4.26%, reflecting growing demand for estate planning solutions that don’t sacrifice returns.
- The use of BPR is growing: the cost to Treasury rose by almost 100% to £415m from 2007 to 2014.
Benefits of Report:
- Find out what recent rule changes mean for the BPR industry
- Get in-depth analysis of new products in the market
- Learn about crucial BPR due diligence questions that are often missed
- Decide what represents good value for your clients using our key metrics data
- Discover how to work with connections from other professional services firms to maximise opportunities for new business
- Review case studies to see the potential uses of BPR investments