Estate planning services are one of the ways to reduce inheritance tax (IHT) liabilities, particularly with IHT bills on the increase
Inheritance tax receipts hit a record high of £6.1bn in the 2021/22 tax year, and are expected to increase over the coming years due to rising house prices and because the thresholds at which you start paying inheritance tax are frozen until 2026.
If your estate is liable for inheritance tax, it will be paid by your dependants or beneficiaries on your death. It can cause financial stress and additional paperwork at what is likely to be a difficult and emotional time for your loved ones.
Inheritance tax is a voluntary tax. This doesn’t mean you can avoid paying tax where it’s due, but there are ways you can reduce or avoid inheritance tax by planning ahead.
This is where an estate planning service can help and below we explain how services such as the ProVen Estate Planning Service work and why they could be considered as part of inheritance tax planning.
Before discussing the benefits of an estate planning service, here is a brief summary of how inheritance tax can be reduced for your beneficiaries.
1. Gifting - you can give away money in your lifetime, although inheritance tax may have to be paid if you die within seven years of making the gift (there are exemptions for small gifts).
2. Giving money away through income - you may be able to make gifts out of surplus income that will not be liable for future inheritance tax.
3. Pensions - money saved into a pension will likely fall outside your estate, and is therefore free of inheritance tax
4. Putting money in a trust - assets in a trust won’t form part of your estate if you live for seven years after putting the assets into the trust. But bear in mind that when assets are put into a trust they no longer belong to you.
5. A life insurance policy - a payout from a life insurance policy may not be subject to inheritance tax if held in a trust.
6. Business relief - money invested in companies that qualify for business relief may be free from inheritance tax if held for a minimum of two years.
The first three options involve giving money away in an individual’s lifetime, meaning you lose control and access to the money if you need it.
A life insurance policy that covers you for whole-of-life is a very effective protection against inheritance tax, but it involves early planning. By the time many people get round to thinking of life insurance, the premiums are expensive or an individual is unable to take out a policy due to ill health.
This is where business relief can be a great tool for older individuals looking to mitigate inheritance tax, as it offers faster inheritance tax exemption than giving money away during your lifetime.
Taking advantage of business relief to reduce inheritance tax is a key feature of estate planning services.
Business relief is an investment incentive that allows individuals to invest into UK companies while planning for inheritance tax.
Shares in companies that qualify for business relief can be passed on free from inheritance tax, if they've been held for at least two years and you are invested in them still at the time of death.
Another benefit of business relief is that you retain control of your money. The investment is held in your name, meaning you can access the capital if needed - unlike situations where you have given the money away.
Many people come round to inheritance tax planning later in life. So the opportunity to benefit from 100% inheritance tax relief after just two years, while retaining ownership of the money, is a key reason why business relief is considered by many individuals in estate planning.
There are a number of ways to get access to business relief.
One of these is to be a director of a company and to own shares in your company (we will not go into detail about this here).
Instead, the vast majority of people will access business relief by investing in a service that provides access to regulated, packaged retail investment opportunities.
This is what we do at the ProVen Estate Planning Service, building on our lengthy track-record managing venture capital trusts, another significant tax-efficient investment scheme.
Aims of an estate planning service
The overall aim of an estate planning service is capital preservation, investment growth or both - perhaps through also investing in AIM-listed companies.
Although business relief investments are defined as high-risk by regulators as standard, we at the ProVen Estate Planning Service focus on low-risk investments by investing in companies that own tangible assets and benefit from reliable income streams.
We aim for returns of 4%-5% a year, and have a long track record of delivering these returns as a minimum. While other forms of investing may produce higher yields, our aim is to preserve an investor’s capital as much as possible by investing in secure companies - while offering the chance for a low level of return to help keep pace with inflation.
Estate planning services are most suitable for older investors, or those in ill health, who are seeking steady growth and capital preservation.
An estate planning service typically invests in unlisted companies, and each will have a different investment focus. At the ProVen Estate Planning Service, we focus on companies that have the potential to deliver modest capital growth and consistent income that can be returned to shareholders through dividends.
The ProVen Estate Planning Service is a discretionary investment platform. This means that - based upon your needs and preferences - any investment will be structured across four trading companies, which span our two core investment strategies of solar and lending.
We believe the UK solar industry has the potential for huge growth over the coming decades as the Government strives to achieve net zero by 2050.
The UK solar industry benefits from inflation-linked payments to producers of renewable energy as part of a broader package of Government support.
Interest repayments from loans to established companies can deliver steady income to shareholders. Meanwhile, money loaned to these businesses will help fund company growth and expansion, ultimately boosting their value and benefiting shareholders.
You can find out more about our structure and areas of investment focus here.
In summary, key features of an estate planning service:
- Invests in companies that may qualify for business relief, meaning an investor’s holdings become exempt from inheritance tax after two years. This compares to giving money away in your lifetime, which is inheritance tax-exempt after seven years
- Targets capital preservation and investments that offer modest but secure returns
- Invests in unquoted companies that may facilities loans to companies or take an equity stake
- Suitable for older clients or those with a shorter investment horizon of at least two years
- Money invested in an estate planning service remains in the client’s name, meaning you maintain access and control
- Investors can ask a service to sell their holdings at any time
- By their nature, business relief investments are classed as high-risk and there is no guarantee your money will grow. You may even lose money.
- Business relief tax legislation may change in future, potentially impacting the qualifying period or the status of a business relief-qualifying company
- There is no guarantee a company qualifies for business relief. HMRC only confirms business relief qualification after an investor’s death.
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Find out more about the ProVen VCTs’ annual shareholder event, which featured insights from Beringea, the investment manager, the boards of the two funds, as well as several of the companies from the portfolio
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