The change, a £1 million limit on full relief from IHT for business / agricultural assets, will affect both small business owners and those investing in specialist BR-qualifying products.

Before planning around these changes, it is important to understand how the ownership structure and plans on death affect the allowance first.

The proposed limit of £1 million is per person and unlike the nil rate band and the residential nil rate band, it is not transferable when unused. This has tax implications which will be shown in the following two examples.

Example: Mirror wills

Sam and Ellie have an estate worth £3 million. Their home is worth £500,000 and they each hold BR investments worth £1 million. The remaining £500,000 is held across cash and ISAs. 

They have mirror wills leaving everything to each other, and on second death, everything to their two children in equal amounts.

If Sam dies first, Ellie will inherit the unused nil rate band and the unused residential nil rate band. Ellie will be holding £2 million in BR investments, £500,000 in property and £500,000 in cash and an ISA.

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The tax position on death will be as follows:

The RNRB is fully tapered away and so not available.

Sam holding £1 million of BR investments has become redundant for IHT mitigation purposes by not using this allowance on his death. It cannot pass to Ellie to use on second death.

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The gift on death solution

Both Sam and Ellie could amend their wills to leave the BR portfolio to their children on death. As qualifying BR assets, this would not use the NRB. Assuming again that Sam dies first, the £1 million portfolio passes to the two children with no IHT due. Ellie remains owner of the rest of the estate.

The effect on second death is then:

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The RNRB has been reinstated in full, which has led to the IHT charge being reduced from £340,000 to zero. This is a specific scenario making use of both the full BR relief and there instatement of the RNRB but it is a useful way of showing that without doing any additional gifting or investing, the potential tax can be reduced by as much as £340,000.

There is a potential problem with this plan though. It requires the first spouse to gift away £1 million of the estate on first death. This is not usually preferable for planning and can be an issue for the survivor’s future care needs and/or retirement needs. The problem is more acute when dealing with younger clients and the inevitable unknown element of when death might occur.  

Fortunately there might be a solution to this, using a trust.

The trust solution

Both Sam and Ellie could update their wills to leave the BR portfolio to a discretionary trust on first death, and keep the remaining assets directed toward the surviving spouse.

The act of transferring a BR portfolio into a discretionary trust is not a CLT/PET for IHT purposes and if it happens on death, the qualification for BR is retained (and so not as an action that uses the nil rate band instead).

The discretionary trust can include the surviving spouse as a beneficiary and this would give the trustees the ability to direct distributions to the survivor if they need support, or to keep funds outside the survivor’s estate should they not need it.

In this example, Ellie would have access to up to £1 million from a discretionary trust should she need it. Assuming any withdrawals she might need are spent (and not saved) the IHT position on death will match that shown in the last example, so result in no charge as opposed to £340,000 in the original pre-planning scenario.

This method requires ongoing management of a trust and ongoing work by trustees, but it has the potential to provide that IHT saving while giving the benefit of access to capital by the survivor.

Summary

Trusts as part of a BR planning strategy are likely to become an efficient client solution and while we are still a year out from the IHT changes, it is worth considering planning or conversations with clients about implementing planning of this kind, should their circumstances point to it as an option.

If you need support at looking into the merits of this approach, or would like more information about any of the solutions covered, the experts at Verve are on hand.