We were recently engaged by a client who had been advised that he should release some equity from his house in order to invest into some tax efficient investments – definitely a bad idea!
Inheritance tax planning is a complex area and although there are a number of ways to save tax very simply and legitimately there are also a growing number of anti avoidance rules to make things more complicated.
Unfortunately there are a number of so called “IHT Specialists” who claim to be able to advise clients how to mitigate their IHT exposure without fully understanding these rules.
This particular IHT specialist (who was a regulated financial advisor and worked for a large and well known umbrella) had advised the client that the only way he could possibly mitigate against IHT was to invest into a collection of either complex or high risk EIS/AIM/Unlisted opportunities. Which would, he assured the client, benefit from BPR (business property relief) in two years, exempting the assets from IHT.
However, what this advisor failed to recognise was the source of the client’s funds and the impact that this would have on the planning.
The client had recently released a significant amount of cash from his home via an equity release scheme but following the March 2013 budget anti avoidance rules were implemented which relate to the order of deductability of debts. The consequence of these rules are that if an individual borrows to fund the purchase of assets qualifying for BPR (and other IHT advantages) the debt must first be offset against that BPR asset.
The consequence is that if an individual borrows (or releases) £1m to acquire BPR assets which after 2 years benefit from 100% exemption from IHT, when the client dies the relief for the debt will be applied to the BPR assets giving the client no relief at all.
If the assets grow in the 2 year period the additional growth will not be subject to IHT, however, many of these structured investments are really just designed for capital preservation. The more likely scenario is that the client invests into EIS or AIM and actually loses money. Although in theory that would reduce his IHT liability!
Subsequently we have been able to advise the client on tax efficient ways to structure his affairs and pass assets down to the next generation in a safe an effective way and is feeling much happier about the situation!