Inheritance tax – Investors who’ve sold a business in the last three years

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

This article is adapted from Octopus Investments’ publication “Identifying clients who could benefit from BPR-qualifying investments” and it is reproduced with its permission. Read more about Octopus Investments

The article has been written in accordance with Octopus Investments’ understanding of the law and interpretation of it at the time of publication: remember tax rules can change and benefits depend on circumstances.

Important:The example scenario that follows is for illustration purposes only and assumes that the nil-rate band is offset against other assets. It is important to note that the risk profile of each portfolio, and any investment growth or losses, is likely to differ. The tax benefits of the BPR portfolios could mitigate the additional risks investors are taking with their money. The scenario assumes the costs for each portfolio are the same, but actual costs may be different.

While family businesses can typically be passed on to beneficiaries free of inheritance tax, if the person sells the business before they die, they could leave behind an inheritance tax liability as the capital will no longer qualify for BPR.

Alan sold his business

Alan used to own a small business, but sold it two years ago. He’s a widower and his health has deteriorated recently, which means he is considering ways to get his financial affairs in order. He would like to be able to leave the proceeds of the sale of his business (£1 million) to his three daughters without them facing a large inheritance tax bill. 

Given Alan’s health, traditional forms of estate planning, such as gifts and trusts, are not appealing as they take seven years before becoming free from inheritance tax.

How a BPR-qualifying investment can help

When Alan still owned his company, his shares were expected to qualify for BPR, meaning he could have left them to his daughters on his death free from inheritance tax. However, now Alan has sold his investment in his business, he is concerned about the inheritance tax that may be payable on the proceeds.

New investments into BPR-qualifying shares usually take two years to become exempt from inheritance tax. However, the good news for Alan is that there is a three-year window during which some or all of the proceeds resulting from the sale of a BPR-qualifying business can be invested back into BPR-qualifying assets. 

If Alan does this, the newly acquired BPR-qualifying assets should be immediately exempt from inheritance tax – he wouldn’t need to wait the two years it would normally take for a BPR qualifying investment to become exempt from inheritance tax.

Alan decides to invest £1 million into a BPR-qualifying investment. Because Alan’s investment qualifies for replacement relief, his new investment should be exempt from inheritance tax from day one.

This means that, on his death, he expects to be able to leave it to his daughters free from inheritance tax.

Key investment risks

  • The value of a BPR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
  • Tax treatment depends on individual circumstances and could change in the future.
  • Tax relief depends on portfolio companies maintaining their BPR-qualifying status.
  • The shares of unlisted or smaller companies (including AIM-quoted shares) could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
  • BPR-qualifying investments are not suitable for everyone. Neither Wealth Club nor Octopus Investments offer investment or tax advice or personal recommendations. If you are unsure an investment is right for you, please seek specialist advice. 

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Important: The information on this website is for experienced investors. This is a very short summary of a complex subject. It is not advice nor a personal recommendation. This article is intended solely to provide basic information – neither Octopus Investments nor Wealth Club offer investment or tax advice. If you are unsure, please seek specialist advice. Investments that qualify for inheritance tax relief place your capital at risk, and the value of the investment can fall or rise.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 

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