Martin's situation
Martin is 78, divorced and has no children, and intends to leave most of his estate equally to his three nieces.
After selling his family home several years ago, Martin moved to a smaller property, leaving him with substantially more cash than he expects to need in the short term.
His adviser has discussed lifetime gifting as one way to reduce the potential Inheritance Tax (IHT) liability on his estate. While Martin would like to reduce the amount of IHT that may ultimately be payable, he is reluctant to make a substantial gift because he would permanently give up ownership of the assets.
Although Martin is currently healthy and independent, he is conscious that he may face care costs later in life and is considering a future move to a retirement development. Retaining ownership of his assets and potential access to his capital therefore remains important to him.
His estate is currently worth £1.8 million:
The adviser's recommendation
Martin’s adviser undertakes a suitability assessment covering his financial position, objectives, investment horizon, liquidity requirements, capacity for loss and attitude to risk. On the basis of this assessment, the adviser determines that Martin has sufficient accessible assets to meet his anticipated needs and the capacity to accept the risks associated with investing £500,000 over the longer term.
The adviser therefore recommends allocating £500,000 of Martin’s cash to a portfolio of shares in unquoted trading companies expected to qualify for Business Relief (BR).
The investment remains in Martin’s name, giving him potential access to the capital if his circumstances change. However, liquidity is not guaranteed. A sale may take time, the proceeds may be lower than the amount invested, and disposing of the shares may affect his IHT position.
Under current rules, the underlying business assets need to have been held for at least two years prior to death or transfer, and still qualify at the relevant time, for BR to apply.
Business Relief depends on the qualifying conditions being met at death or transfer.
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 Martin’s inheritance tax position, with and without the proposed £500,000 investment qualifying for Business Relief.
Retaining ownership while planning ahead
How the proposed approach addresses Martin’s wish to retain ownership and potential access.
Suitability depends on Martin’s needs, accessible assets and capacity for loss. Selling the shares may affect his inheritance tax position.
Illustrative assumptions
- Martin dies more than two years after making the investment.
- The full £500,000 remains invested and qualifies for BR at the date of death.
- Martin has not used any of the £2.5 million combined allowance for property qualifying for 100% Agricultural Property Relief (APR) or Business Relief (BR).
- The value of Martin’s estate and the BR-qualifying investment is assumed to remain unchanged. In practice, the value will fluctuate, and any change would alter both the value of Martin’s estate and the IHT figures shown.
- Martin’s full £325,000 nil-rate band is available.
- The residence nil-rate band does not apply because Martin is leaving his estate to his nieces.
- Fees, charges, 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 adviser has considered lifetime gifting as an alternative. A gift could fall outside Martin’s estate if the relevant conditions were met, but it would require him to relinquish ownership of the assets permanently, leaving them unavailable if his circumstances changed.
By contrast, the recommended approach reflects Martin’s wish to retain ownership and potential access to his capital while seeking to reduce the IHT liability on his estate. It also reflects the adviser’s assessment that he understands and is able and willing to accept the higher investment and liquidity risks involved.
On the stated assumptions, investing £500,000 in shares that qualify for BR could reduce Martin’s taxable estate by the same amount, lowering the estimated IHT liability from £590,000 to £390,000.
Key risks and considerations
- Capital is at risk. The value of the investment may fall as well as rise, and Martin may receive back less than the amount invested. Investments in smaller, unquoted companies generally involve greater risk.
- Business Relief is not guaranteed. The investment must satisfy the qualifying conditions at the relevant transfer, and the tax treatment will depend on Martin’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. Martin’s adviser should review the recommendation if his circumstances, objectives or need for accessible capital changes.
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.
