What qualifies for BPR?
To qualify for BPR, the company must be relatively small, in other words, one which is not listed on the main London Stock Exchange or listed only on the Alternative Investment Market (AIM). In addition, shares must be in a bona fide trading company so, for example, a company formed only to own and receive rent from a portfolio of properties may not qualify.
What’s in it for you?
This inheritance tax break is very attractive for large estates, as a form of estate and inheritance planning.
The main attraction for using BPR in IHT planning is the speed of the exemption. It takes seven years for assets that are given away or placed in trust to be fully exempted from inheritance tax. However, by contrast, a BPR-qualifying investment is exempt after just two years, provided the shares are held at the time of death.
Losing control of money is one of the most common reasons that investors choose not undertake inheritance tax planning. BPR overcomes this objection because investors in BPR-qualifying companies retain ownership and control of them and so continue to benefit from the investment during their lifetime. Conversely, if the owner sells the asset, the IHT relief is lost and the asset and its growth comes back into the estate and will be taxed on death.
By contrast, an investor may retain no benefit in any asset given away (either to a person or trust), if they wish the gift to be effective in reducing inheritance tax.
Investing in BPR-qualifying companies is simple. It avoids the complex legal arrangement involved with giving money to a trust and the medical underwriting necessary for setting up a life insurance policy.
Since 2013, AIM shares can be held in an Individual Savings Account (ISA), providing additional Income and Capital Gains Tax benefits on top of IHT exemption. While AIM-listed companies are relatively small when compared to those listed on the main stock exchanges, they are usually much larger than unlisted companies. AIM shares, though less risky than unlisted shares, are however often difficult to sell quickly and at a competitive price. There is also a bigger risk of failure that would be the case with fully listed shares.
Investors can, however, reduce the financial risk of one company failing by using a portfolio of unlisted or AIM-listed companies and there are discretionary fund managers who can help with this. Such a service will also undertake to check that the companies in the portfolio all continue to qualify for BPR, which cannot be taken for granted.
What’s the catch?
The value of a BPR-qualifying investment will depend on the performance of the underlying company or companies. As with all investments, your capital is at risk and there is a possibility of loss. A BPR scheme/company would be considered to be at the higher end of the risk spectrum.
The value of shares held in AIM-listed and unquoted companies will in all probability fluctuate more than those listed on the London Stock Exchange. It can often be harder to sell them, as there are fewer potential buyers than in mainstream markets.
Changes in a company’s strategy could affect its BPR status and HMRC only considers the situation at the time a BPR claim is made.
How do I invest in BPR or AIM shares?
Choosing the right BPR-qualifying investment is difficult and there are no guarantees that companies will retain their BPR status. Many investors, therefore, choose to have a portfolio managed professionally.
Specialist investment managers will create portfolios of BPR-qualifying companies and monitor these firms on behalf of investors over time.
BPR is another powerful tool in your adviser’s armoury to help reduce inheritance tax.
Such investments can help people reduce inheritance tax even if they fear they will not survive seven years.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. The information contained herein has been obtained from sources believed to be reliable but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
Please contact us before you invest/disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.