Amira's situation
Amira is 72 and sold her specialist logistics software company 20 months ago for £2 million. She had owned and managed the company for 18 years, and her shares were expected to qualify for Business Relief (BR) immediately before the sale.
Following the sale, Amira invested £1.1 million in a conventional investment portfolio and retained £900,000 of the proceeds in a separate deposit account.
Amira is divorced and has no children. She intends to leave her estate to her niece. Following a recent health scare, she is concerned about the potential Inheritance Tax (IHT) liability on her estate.
Amira is reluctant to make a substantial lifetime gift because she wants to retain ownership of her assets and potential access to her capital. She also understands that a gift may still be taken into account for IHT purposes if she dies within seven years, depending on the circumstances and the exemptions or reliefs available.
Including her home and other investments, her estate is worth approximately £3 million:
The adviser's recommendation
Because Amira sold her business only 20 months ago, her adviser considers whether an investment made with the retained sale proceeds could qualify as replacement business property. The adviser also reviews the amount Amira may need to keep readily accessible, her longer-term objectives and investment horizon, and her ability to accept the capital and liquidity risks of investing in unquoted companies.
Under current rules, the ownership periods of original and replacement business property may be combined where the replacement-property conditions are met. The original and replacement property must have been owned for periods totalling at least two of the five years before the relevant transfer. The original and replacement property must have been owned for periods totalling at least two of the five years before the relevant transfer, and the replacement shares must be held on death.
After taking account of Amira’s accessible assets and expected needs, the adviser recommends allocating £750,000 of the retained sale proceeds to shares in unquoted trading companies expected to qualify for BR. If the replacement-property conditions are met, the ownership periods of her former business and the new investment may be combined when determining whether the two-year ownership requirement has been satisfied. Specialist tax advice would be needed to confirm the position.
Original and replacement ownership periods may be combined, subject to replacement-property conditions. Specialist tax advice is needed to confirm eligibility.
A note on this scenario
This hypothetical scenario is designed to help advisers think through how this type of planning might apply in practice. Whether it would suit a client will depend on their full financial circumstances, objectives, needs, capacity for loss and attitude to risk, along with the features, risks, charges and tax treatment of any investment being considered. Any recommendation would need to be made by the client’s financial adviser following a full suitability assessment.
This scenario is for illustrative purposes only and does not constitute investment, pension, tax, financial or legal advice. Actual outcomes will depend on investment performance, charges, the client’s circumstances and the tax legislation in force at the relevant time.
What it could mean in numbers
An illustration of Amira’s inheritance tax position, with and without the proposed £750,000 investment qualifying for Business Relief.
How replacement business property works
Connecting the original business to the proposed replacement investment.
Subject to the replacement-property conditions, including the required connection to the original property. The replacement investment must qualify before the relevant transfer.
Illustrative assumptions
- The £750,000 investment is made using proceeds retained from the sale of Amira’s business and has the required connection with the original property.
- The ownership periods of the original and replacement property total at least two of the five years before the relevant transfer.
- The full investment remains in place and qualifies for BR at the relevant transfer.
- Amira has not used any of the £2.5 million combined allowance for property qualifying for 100% Agricultural Property Relief (APR) or Business Relief (BR).
- Her estate remains worth £3 million and her full £325,000 nil-rate band is available. The value of the £750,000 investment is assumed to remain unchanged throughout, with no growth or fall in value. In practice, the value will fluctuate, and any change would alter both the value of Amira’s estate and the IHT figures shown.
- The residence nil-rate band does not apply because Amira has no direct descendants.
- Fees, charges, debts, gifts, other exemptions and reliefs are excluded. In practice, the investment would be subject to fees and charges, which would reduce the amount invested and therefore the potential IHT savings shown.
Why the adviser recommends this approach
The recommendation uses part of the retained sale proceeds in a way that reflects Amira’s wish to retain ownership and potential access to her capital while seeking to reduce the IHT liability on her estate. It leaves
approximately £1.7 million in conventional cash and investments, excluding her home, to meet her expected needs and provide accessible capital if her circumstances change.
On the stated assumptions, the £750,000 investment could reduce Amira’s taxable estate by the same amount and lower the estimated IHT liability from £1,070,000 to £770,000.
* Excluding her home. **Based on the stated assumptions and subject to qualifying conditions.
Key risks and considerations
- Capital is at risk. The value of the investment may fall as well as rise, and Amira may receive back less than the amount invested.
- Business Relief is not guaranteed. The investment must satisfy the qualifying conditions at the relevant transfer, and the tax treatment will depend on Amira’s individual circumstances and the legislation then in force, which may be subject to change, and such changes may be retrospective.
- Liquidity is not guaranteed. Shares in unquoted companies can be difficult to sell, so access to capital may be delayed and the amount realised may be lower than expected.
- The investment must remain suitable. Amira’s adviser should review the recommendation if his circumstances, objectives or need for accessible capital changes.
- The replacement-property provisions are technical. Relief may be restricted or unavailable if the ownership test, the required connection between the original and replacement property, or another condition is not met. Specialist tax advice is essential.
Important Notice
For professional advisers only.
This article is for information purposes only and does not constitute investment, tax, financial or legal advice. It does not constitute an offer to buy or sell an investment or solicit any such invitation.
The information is believed to be accurate at the date of publication, but no representation or warranty, stated or implied, is made or given by any person as to its accuracy or completeness and no responsibility or liability is accepted for any such information or opinion. Tax treatment depends on individual circumstances, and tax rules may change.
Issued by Beringea LLP of Charter House, 55 Drury Lane, London, England WC2B 5SQ. Registered in England and Wales under number OC342919. Authorised and regulated by the Financial Conduct Authority under number 496358.
