With many tax allowances now frozen at current levels until at least April 2026, is it time to consider Business Property Relief (BPR) investments to compliment more traditional tax efficient investments like ISAs and pensions?

BPR has now been around for over 40 years and allows individuals to pass on BPR qualifying assets entirely IHT free to their beneficiaries upon death (subject to certain stipulations) along with potentially other tax benefits. Successive Governments have encouraged the use of BPR schemes and offered tax advantages to investors in order to encourage private funding into new and innovative UK companies, thus stimulating and growing the UK economy.

Not all investments into businesses will qualify for BPR and there is always the possibility that tax rules and legislation could change in the future, however BPR qualifying investments will typically be in shares in an unquoted qualifying company, shares in a qualifying company listed on the Alternative Investment Market (AIM) or an unincorporated qualifying trading business, a partnership, for example.

As investment will generally be into unlisted, start-up companies the investment risk can be high, with greater volatility and be harder to sell. However by diversifying investment across several potentially BPR qualifying companies you have the potential to spread the risk somewhat, but these are not suitable investments for everyone and there is a real risk that investment capital can be lost therefore it is imperative that investors have sufficient income and capital elsewhere in order to maintain their lifestyle.

Just as with more traditional investments, for example, into unit trusts, open ended investment companies (OEICs) and managed funds, risk should come hand in hand with reward. In addition to the potential for greater growth from small start up businesses compared with the established large caps, the Government offers certain tax advantages to investors.

There are different types of BPR qualifying investments which carry different rules, however some of the tax advantages on offer could be the ability to reclaim up to 30% of the value of your investment in income tax relief, the ability to defer a capital gain and the potential to receive tax free dividends. They also offer the ability to pass on qualifying shares to your beneficiaries entirely free of IHT (provided shares are held at the time of death and have been held for at least 2 years – note the much shorter time frame than the ‘7 year rule’ applying to some gifts!) and should not use your inheritance tax nil rate band, albeit the value of BPR investments remain in your estate for the purposes of calculating the residence nil rate band.

BPR investments are not suitable for everyone, however with frozen tax and tax efficient investment allowances for at least the next 5 years, compared to rising incomes and estate values, it is inevitable more people will find themselves with bigger tax bills in the coming years and perhaps this will mean that BPR investments will become as familiar as more traditional tax efficient investments.

To those who have maximised their ISA and pension allowances or those who find themselves now needing to address estate planning please contact us for a completely free, confidential and no obligation chat.

August 2021