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Not getting any younger - longevity and the likely success of estate planning

We all intuitively know that as we get older the time available for estate planning is running out. But when some Inheritance Tax strategies take seven years to have an effect, it’s important to understand a client’s chances of successful planning.

This blog is aimed at qualified financial advisers. It should not be construed as financial advice and it should not be used as the basis for any investment decisions. Investments with Oxford Capital should only be made on the basis of our full Information Memorandums and application documents. 

However much you encourage clients to plan their estates sooner rather than later, many will postpone the task. Sometimes, this is just because nobody likes to contemplate death whilst they still feel fit and healthy. But there can also be practical reasons to wait. None of us can be sure how long we will live or what sort of care and support we will need as we get older. It is hard to know how much money we will need, so planning for Inheritance Tax, which often involves giving up control of our assets, is understandably pushed down the to-do list.


The cost of waiting

The problem facing clients is that estate planning cannot be left until the last minute.

Common Inheritance Tax strategies, including lifetime gifting and transfers into trust, require the individual to survive for a further seven years. And as we get older, the statistical probability of making it to that milestone start to plummet.


Improving the odds

As a result, many advisers are turning to investments that qualify for Business Relief (BR), which can take just two years to achieve shelter from Inheritance Tax.

We intuitively know that we must have more chance of surviving for two years than seven years. But the difference in probabilities is far more pronounced than many clients may realise, as the table below shows. For example, a man who makes a BR-qualifying investment for the first time at the age of 80 has an 88% chance of living for the required two years. By contrast, if he opts for a seven-year strategy, his chances of success drop to 64%.

Table 1: Probability of success

Source: Office of National Statistics 2014

Types of BR investment

Originally targeted at business owners, BR has now become a mainstream IHT solution.  Introduced in 1976, BR provides relief on qualifying assets at up to 100%. As a statutory relief, it can offer a non-contentious planning opportunity.

Accessing BR-qualifying assets does not have to involve owning your own business.  A number of investment management firms have developed investment opportunities designed to help people access the benefits of BR. These investments typically fall into two categories.

1. AIM portfolios

One quirk of the BR rules is that shares in companies listed on the Alternative Investment Market (AIM) are considered to be unlisted, with around 70% of the companies on AIM qualifying for BR. Some investment managers offer an AIM BR service, where they will actively manage a portfolio of AIM shares, aiming to secure capital growth whilst also monitoring the companies to make sure they meet the BR criteria.

2. Asset-backed IHT Investment Services

These investments usually have names such as ‘Inheritance Tax Service’ or ‘Estate Planning Service’. They are designed to preserve the value of capital, so they typically target modest annual returns in the form of either capital accumulation or dividends.

Through these services, clients will own shares in companies that should meet the requirements of BR qualification. The underlying investment activities vary, but often the companies will own physical assets that generate regular and preferably stable revenues.  Examples could include care homes, nursery schools or renewable power installations.


Helping clients retain access to their wealth

The speed with which BR investments can become effective is their major selling point, particularly for clients who are elderly or in the early stages of failing health. But it is also worth noting that the decision to invest in BR assets is usually reversible.

Strategies like lifetime gifting involve transferring wealth into the hands of other family members. But IHT investment services, like those described above, keep the client’s capital within their control. Some or all of the underlying assets can usually be sold on request, allowing funds to be returned to the client if there is a significant change in their circumstances or financial plans.

As such, BR investments are a form of IHT planning that relatively younger clients may consider investing in, because they can still access their capital if their later life financial needs turn out to be more costly than expected.


Key benefits of Business Relief

  • Flexibity – Can accommodate a change in circumstances
  • Availability – Access and control retained
  • Simplicity – No complicated trust structures or medical underwriting
  • Timeliness – Freedom from IHT after two years if held on death

In conclusion, BR provides an effective way of sheltering assets from IHT sooner rather than later, whilst enabling clients to retain full access to, and control over, their investment.  In addition, where the client has lost mental capacity, BR can offer attorneys the opportunity to shelter the estate from IHT. With estate planning on many client agendas, it may the right time to consider how BR can enhance your advice proposition.