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Personal Finance

Estate planning…..the sequel: Joe Coten brings us some additional advice on inheritance tax planning.

Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.


ather than being a sneak preview of the afterlife, this is more a follow-up to my earlier articles this year on the subject of inheritance

tax mitigation. The motivation for such tax mitigation let us remind ourselves, is that you care a lot less for HMRC than for your own flesh and blood! With the inheritance tax

allowance of £325,000 now frozen till 2018, proper planning in this area is essential if you wish to avoid making a substantial posthumous donation to government coffers. At present more than 4 million UK citizens are liable to inheritance tax (Telegraph June 2010). I would wager a fair number of these have an address in EC2. The approaches I have already discussed involve making outright

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gifts of capital, whilst in some cases retaining access to some of it. This is a simplification; however the effectiveness of the planning generally depends on your survival for seven years after making the gift. If you are considering estate planning and you are somewhat advanced in years, this regrettably may be a problem. For discounted gift trust arrangements medical underwriting is also required, so if you are in poor health, the size of the discount allowed by HMRC may well prove to be less than worthwhile. A further factor is the reluctance

to lose control and access to your capital. However tax efficient a trust arrangement may be there has to be a delegation of control and a limitation of access to your money. This sometimes proves a barrier to planning full stop, with the net result being that there is no estate planning. One of your principal beneficiaries could turn out to be HMRC after all, if the bullet can’t be bitten. One planning avenue that I

haven’t explored as yet is the use of Business Property Relief (BPR). The idea behind the legislation that put this relief in place was that family businesses should not have to be broken up to fund inheritance tax. As frequently happens, the spirit and the letter of the law don’t always coincide and clever bean-counters have come up with a perfectly legitimate planning strategy that makes use of BPR. One immediate advantage of using a BPR scheme is that the qualifying period to write off an inheritance tax liability is just two years. This is of course a far more attractive proposition than having to wait seven years. But to be effective your money

needs to be invested in unquoted shares, and the companies in question need to be qualifying trading companies; ie companies in a nutshell that provide employment.


Unquoted companies of course tend to be smaller businesses and investing in such companies is riskier than keeping your money in the bank. Having said that, a look back over the past few years at how banks and building societies have conducted themselves may induce a wry smile! It will come as no surprise to learn

that developers of financial products have come up with a way of using the friendly BPR tax treatment to provide beneficial arrangements that enable you to invest money in unquoted companies and at the same time reduce the risk element to a minimum. They do this by selecting businesses with strong cash positions and dependable income streams. Providers of this type of scheme recognise that the main motivation for a great many BPR investors is tax mitigation rather than capital growth. For this reason the type of managed risk product discussed above is only likely to offer a return of around 3% pa, which means that all being well the value of the capital invested will broadly keep pace with inflation As mentioned earlier, a large part

of the attraction of this type of product is that you can at any time have complete access to all or part of your money by selling your shares. Capital Gains Tax may of course be payable, if your profit on the share sale exceeds the annual CGT allowance. Due to the nature of the investment, this is unlikely. An inescapable point is that

investing in small companies, even with the investment risk carefully managed, is not everyone’s cup of tea. Perhaps a reassuring way of looking at this might be that to be worse off after taking the IHT bill into account, your investment would need to drop 40% in value before you are out of pocket.

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