Effective estate planning requires strategic tools to manage and mitigate inheritance tax (IHT), especially for those with larger estates. One such tool is Business Relief (BR), which can help reduce or eliminate IHT on certain business assets passed down after death. However, traditional methods often fall short of providing a quick solution. In response, packaged IHT mitigation solutions combine BR with life insurance, offering a faster route to IHT mitigation for some individuals. This article will explore the benefits, risks, and suitability of these solutions in modern estate planning.
What Is Business Relief?
Business Relief (BR) is a tax relief that helps lower or eliminate IHT on business assets, such as shares in private trading companies or certain types of land and machinery used in business. Initially introduced in the 1970s to prevent families from selling businesses to cover IHT bills, BR has expanded to encourage investments in unlisted businesses, including those on the Alternative Investment Market (AIM).
BR is especially beneficial because it offers a much shorter qualification period compared to other IHT strategies. Typically, gifts made during your lifetime take seven years to fall outside of your estate for IHT purposes. However, investments qualifying for BR can be passed on free of IHT after just two years, provided they meet the necessary conditions. From April 2026, the relief will be even more advantageous, offering 100% relief on the first £1 million of shares, with a 50% relief on any amount above that.
What Are Packaged IHT Mitigation Solutions?
Packaged IHT mitigation solutions combine Business Relief with life insurance to protect against IHT liabilities. These solutions invest in a diversified portfolio of business-relief-qualifying assets, aiming to reduce IHT exposure. The insurance component serves as a safety net, covering the IHT liability if the investor dies before the two-year holding period is completed. Once the two years pass, the investment is typically exempt from IHT.
The main advantage of these products is that they can expedite the qualification process, ensuring that your estate is protected from IHT even if you do not survive the full two-year waiting period. However, there are high upfront costs and ongoing management fees to consider. The insurance also requires a health declaration, and coverage is often capped, which limits availability depending on your health.
Benefits of Packaged IHT Mitigation Solutions
One of the key benefits of packaged IHT solutions is that they allow individuals to transfer assets free of IHT without waiting the usual seven years. Once the two-year requirement is met, the full value of the investment qualifies for BR. This is especially valuable for older individuals or those with health concerns who worry they may not survive the seven-year period for traditional IHT mitigation.
Additionally, these solutions provide a quicker way to reduce IHT, which is attractive for those who want to make fast progress in lowering their tax liability. This makes them a popular choice for those seeking more immediate results or a more tax-efficient retirement.
Disadvantages of Packaged IHT Mitigation Solutions
Despite their advantages, packaged IHT solutions come with several drawbacks. The most significant disadvantage is the high cost associated with these solutions, including the initial fees and ongoing insurance premiums. These costs can be prohibitive, particularly for individuals with smaller estates or those who have access to more affordable alternatives.
Moreover, the investments involved in BR can be risky. They tend to be illiquid, volatile, and heavily reliant on smaller, unlisted companies. As a result, they may not be suitable for individuals who prefer low-risk, liquid investments. Additionally, the insurance component may not be available to those with serious health concerns or a limited life expectancy.
Who Are Packaged IHT Solutions Suitable For?
Packaged IHT mitigation solutions are particularly well-suited for individuals with larger estates who seek faster IHT mitigation than traditional methods like gifting or trusts. These solutions are appealing to those who are approaching an age or stage in life where traditional methods may not be viable. They are ideal for people who need to act quickly or who are concerned about surviving the two-year qualification period for BR.
However, due to the high investment risks involved, these solutions are best used by individuals who are comfortable with risk and who understand the long-term implications of these decisions. Consulting with a financial adviser is crucial to determine whether packaged IHT solutions align with your estate planning goals.
How Do They Fit Into a Broader Estate Planning Strategy?
Packaged IHT solutions work well when integrated with traditional estate planning tools like gifting and trusts. For individuals who have already taken steps to reduce IHT but want a quicker solution, these strategies can complement existing plans.
For example, Margaret, 78, has already made significant strides in reducing her IHT exposure by gifting £250,000 to her children, placing £300,000 in a discretionary trust, and using her annual gifting allowances. However, she still faces a potential IHT liability. She decides to invest £400,000 into a BR-qualifying portfolio using a packaged IHT solution. If she survives the two-year holding period, the full amount will qualify for 100% BR, potentially saving her beneficiaries up to £160,000 in tax. If she doesn’t survive the two years, the insurance will cover the IHT liability, ensuring her estate benefits from the mitigation strategy.
Final Thoughts
Packaged IHT mitigation solutions can be a valuable addition to your estate planning strategy, but they aren’t for everyone. They are best used as part of a broader strategy and should be considered carefully, especially with the help of a financial adviser. With high fees and investment risks, it’s essential to assess whether these solutions fit your financial goals and risk tolerance.
As part of a comprehensive plan, these solutions can offer a faster way to mitigate IHT and ensure your estate is passed on efficiently. However, it’s important to weigh the costs and risks carefully to make an informed decision.
