And while gifting is undoubtedly simple, straightforward and a means of passing wealth on to loved ones, it does mean those assets are immediately outside an individual’s control, should their circumstances change.
A potentially exempt transfer will also take seven years to be outside a client’s estate for IHT purposes.
Alternatives to gifting
As economic uncertainty makes gifting less appealing, what else can clients do to mitigate IHT?
Advisers continue to consider settling assets into trust (46 per cent) and taking out insurance to pay IHT (41 per cent) as important options.
In respect of the former, however, set-up costs can be expensive, structures complex, and ultimately there is a loss of control over the assets placed in a trust.
Insurance remains a viable option, but might not be appropriate and available, especially if there are health concerns.
For clients with money in property, taking lifetime mortgages to release equity has traditionally been seen as another way to tax-efficiently pass on wealth to the next generation.
After all, for many, homes remain their largest asset.
Again, however, the current economic environment is likely to make lifetime mortgages less attractive.
The housing market is already slowing down, and interest rates for lifetime mortgages have increased significantly during the last few months, as gilt yields have risen.
This may make lifetime mortgages less attractive in the short term, given that debt accumulates much faster with higher interest rates.
While it is right and necessary to consider all these options when advising clients on intergenerational planning, there are other options to consider.
Business relief – an appealing solution
Business relief is a tax relief that is offered on shares in certain private companies and certain companies listed on the alternative investment market.
As long as the company that the shares are being held in is a mainly trading company, they can attract BR, and unlike gifting or trusts, which can take seven years to obtain full IHT relief, BR-qualifying investments benefit from relief after just two years.
The key qualification for BR is that the investment is made into a qualifying trading business. This is defined as a business of which less than 50 per cent of its total activity is investment-related activity.
To qualify, individuals do not have to own their own business – instead, they can invest in either private trading companies or Aim-quoted companies.
A key benefit of BR is that it enables a client to retain control of their assets, in their own name, and to generate a positive return.
