IHT bills rise and more estates are caught – what relief might investors get?

Inheritance tax (IHT) bills are increasing. As surging inflation and soaring house prices tip more homeowners’ estates over the threshold, the average inheritance tax (or IHT) bill will rise to £266,000 this year, according to HMRC figures.

Effectively a tax on the nest egg you’ve carefully put aside for loved ones, 40% more families are being caught by IHT than just a decade ago – and the bill is 57% higher. Worse still, the trend is expected to continue – Treasury forecasts indicate by 2027 annual IHT receipts will rise to nearly double those of 2017.

And yet it’s simpler than many think to mitigate or even completely eliminate any IHT liabilities your estate may have. 

This article looks at one option experienced investors concerned about IHT might consider: investing tax-efficiently in companies that qualify for Business Property Relief (BPR).

Inheritance tax in a nutshell

Your loved ones, other than spouse or civil partner, could typically face a 40% inheritance tax on assets you bequeath them over an allowed threshold.

If you are a single homeowner passing on assets to direct descendants, the tax-free allowance is up to £500,000 (£1 million if you’re married or in civil partnership). This includes your £325,000 nil-rate band, plus £175,000 residence nil-rate band. 

The residence nil-rate band is reduced £1 for every £2 for estates worth over £2 million; if your estate is worth £2.35 million you might lose it altogether.

Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value: you could lose all the money you invest.

What BPR is and why the IHT relief?

BPR was first introduced in 1976 to allow family businesses to be passed down through generations free of IHT. Its scope later widened, making BPR available for a range of assets in which you can invest – this includes shares in certain private and AIM-quoted companies, as well as investments in commercial forestry.

If a company qualifies for BPR, its shareholders could benefit from IHT relief after two years, provided certain conditions are met (see Key Points below). There is no upper limit or allowance restricting how much you can invest. If conditions are met, the whole value of the investment – be it £10,000 or £10 million – could potentially attract 100% IHT relief.

BPR investments – key points

  1. You invest in companies that qualify for BPR – many private and AIM-quoted companies should qualify for the relief.
  2. There are ready-made managed portfolios available – each offering its own investment strategy, plus the resources to select and monitor investments. In addition, IHT portfolio providers can help make it simpler for an investor’s beneficiaries to submit a claim for the relief on death.
  3. Your investment could be IHT free after two years (compared to seven years for other forms of estate planning), provided the business is still BPR-qualifying and you still hold the shares (or a BPR-qualifying replacement) on death. These are the current rules – they could change. 
  4. You keep control of the investment: you can make withdrawals or liquidate it altogether, should your circumstances change. 
  5. On the flipside, because it is an investment, your capital is at risk, and the kind of assets that qualify tend to be smaller, more volatile companies. So, only experienced investors who could afford a total loss of capital should consider this.

Please note, tax benefits depend on circumstances and tax rules can change.

Who might consider these IHT-free investments?

If you’re an experienced investor with a large estate likely to be caught by IHT and are considering available estate planning options – plus you’re comfortable with the typical risks of investing in smaller companies – investing in BPR-qualifying portfolios could offer significant benefits mainly to do with speed, control and relative simplicity.

For investors who wish to pass on their ISAs free of IHT

Cash and Stocks & Shares ISAs can offer tax-free income and growth during your lifetime – but will form part of your estate and therefore potentially be subject to 40% inheritance tax.

An alternative is to invest in AIM ISAs. These are professionally managed portfolios of AIM-quoted companies that should qualify for BPR. Note, though, AIM shares are more volatile, less liquid and generally seen as higher risk than more mainstream investments: you could lose your capital.

The ISA allowance for new subscriptions is £20,000 a year, but you can transfer larger amounts from existing ISAs into an AIM ISA portfolio. Once invested, any growth and income are tax free. AIM ISAs should be free from IHT if held at least two years and upon death.

For investors who wish to retain access to their capital

Unlike putting money in trust or gifting it to loved ones, a BPR-qualifying investment remains in the investor’s name, and the capital can be accessed if ever needed. 

One option is to invest in an IHT portfolio – a managed portfolio of companies that qualify for BPR. The managers tend to look for companies they believe are lower risk and with relatively predictable cash flows. Depending on the provider, investors can make ad hoc requests to sell some shares to access the cash, or even set up regular withdrawals. 

Note, liquidity cannot be guaranteed and shares sold or money taken out of the investment will no longer be exempt from inheritance tax.

For investors who’ve sold a business in the last three years

Whilst family businesses may typically be bequeathed free of inheritance tax, if the stake in the business is sold before death, that capital no longer qualifies for BPR and could potentially incur a large inheritance tax liability.

However, there is a three-year window during which any of the proceeds from the sale of a BPR-qualifying business can be invested back into BPR-qualifying assets, to remain IHT-free. The new investment should be IHT-free immediately.

Other IHT-free options: EIS and SEIS

Other than BPR-qualifying investments, if you invest in EIS and SEIS it is worth remembering these should qualify for IHT relief after two years of investment – part of the generous tax package they offer.

EIS and SEIS should not be used exclusively as an IHT planning tool. Like IHT portfolios, EIS and SEIS are high risk and you could get back less than you invest.

Learn more and view EIS offers »

Learn more and view SEIS offers »

What to do next? 

Having been prudent enough to accrue wealth during your lifetime, you may not wish to have the taxman take 40p of every £1 you’ve worked hard to save over the years. Read our free guide to explore some of the options.

If you have any questions on the guide or another investment matter, please get in touch. 

You can email us or call us on 0117 929 0511. We're open from 9am to 5.30pm Monday to Friday. 

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.