BUSINESS PROPERTY RELIEF AND INHERITANCE TAX THE BASICS

BUSINESS PROPERTY RELIEF AND INHERITANCE TAX THE BASICS

IMPORTANT NOTICE Winner: EIS Fund Manager of the year in 2014 Winner: EIS Fund Manager of the Year in 2013 Winner: EIS Fund Manager of the Year in 2011 Finalist: EIS Fund Manager of the Year in 2010 Winner: EIS Fund Manager of the Year in 2008 Finalist: Exit of the Year 2013 Finalist: Equity Gap Fund of the Year 2010 Finalist: Equity Gap Fund of the Year 2009 Winner: Young Personality of the Year 2006 Finalist: VC Fund of the Year 2005 This nancial promotion is issued and approved by Oxford Capital Partners LLP ( Oxford Capital ), 201 Cumnor Hill, Oxford, OX2 9PJ. Oxford Capital is authorised and regulated by the Financial Conduct Authority (registered number 585981). Investments with Oxford Capital should only be made on the basis of the relevant Information Memorandum. No reliance is to be placed on the information in this document when making an investment. Tax bene ts depend on individual circumstances and tax legislation is subject to change. 2015 Oxford Capital Partners LLP. All rights reserved. 11/15 Winner: Investor of the Year in 2013 Winner: Investor of the Year in 2012 Winner: Venture House of the Year 2013 Finalist: Venture Exit of the Year 2013 Finalist: Venture House of the Year 2010 Winner: Venture House of the Year 2005 2 GUIDE TO BPR Past performance is not a reliable indicator of future results.

CONTENTS 04 ABOUT OXFORD CAPITAL 06 INTRODUCTION 08 INHERITANCE TAX BASICS 14 INTRODUCING BUSINESS PROPERTY RELIEF 18 PLANNING WITH BPR 22 FREQUENTLY ASKED QUESTIONS GUIDE TO BPR 3

ABOUT OXFORD CAPITAL 4 OXFORD CAPITAL ESTATE PLANNING SERVICE

We are one of the largest and most experienced tax-ef cient investment managers in the UK, and we specialise in Enterprise Investment Schemes and Business Property Relief. We have two investment strategies. Firstly, through our growth strategy we invest in small UK companies from a range of different industries, with a particular focus on technology. Our second strategy is focused on investment in infrastructure assets capable of generating stable, long-term cash ows. Renewable energy and small-scale power generation are particular areas of focus. Our clients invest in these strategies through a number of different investment opportunities, each of which can help with a range of different tax and wealth planning issues. CONTACT US Speak to your adviser to nd out more, or contact us on 01865 860760. GUIDE TO BPR 5

INTRODUCTION 6 OXFORD CAPITAL ESTATE PLANNING SERVICE

SOME IHT STRATEGIES INVOLVE PUTTING ASSETS UNDER SOMEONE ELSE S CONTROL, BUT WHAT IF YOU NEED THOSE ASSETS LATER IN LIFE? WHY ESTATE PLANNING IS DIFFICULT If you are reading this guide, you are probably already thinking about how you can organise your wealth to reduce the amount of IHT your estate will have to pay. The main challenge of IHT planning is uncertainty. Some strategies need to be put in place seven years before death, but none of us can guarantee how long we will live. Some strategies involve putting assets under someone else s control, but what if you need those assets in later life? HOW BUSINESS PROPERTY RELIEF CAN HELP This short guide explains how investments which qualify for Business Property Relief (BPR) can form part of an Inheritance Tax planning strategy. Crucially, BPR-qualifying investments can be sheltered from Inheritance Tax after just two years. They also allow you to retain control of your capital. SEEKING ADVICE Estate planning is usually complicated, and we would always recommend that you discuss Inheritance Tax planning strategies, including the use of BPR, with a professional adviser. GUIDE TO BPR 7

INERITANCE TAX BASICS 8 OXFORD CAPITAL ESTATE PLANNING SERVICE

INHERITANCE TAX ( IHT ) USED TO BE SOMETHING ONLY THE WEALTHIEST FAMILIES NEEDED TO WORRY ABOUT. But in recent years, more and more people are nding that their estates have become valuable enough to be subject to IHT. This is mainly because asset values, in particular house prices, have increased at a faster rate than the nil rate band the value of an estate which can be passed on without paying any IHT. FACTS AND FIGURES 3.5bn IHT COLLECTED BY HMRC IN 2013/14 45,000 ESTIMATED NUMBER OF DEATHS THAT WILL RESULT IN AN IHT BILL IN 2015/16.* 10% *From Of ce for National Statistics data compiled in July 2014. PROPORTION OF ESTATES SUBJECT TO IHT BY 2018/19. IN 2013/14 THE FIGURE STOOD AT JUST 2.8%.* GUIDE TO BPR 9

INHERITANCE TAX BASICS CONTINUED... THE IMPACT OF INHERITANCE TAX In simple terms, if the total value of all your assets including your home is greater than the 325,000 nil rate band, then IHT will be payable after your death. The situation is slightly different for married couples and civil partners. When the rst individual dies, their assets can pass to the surviving individual free of IHT. The surviving individual also effectively inherits their partner s nil rate band, doubling to 650,000 the amount that can be passed to the next generation without suffering IHT. The value of an estate which exceeds the nil rate band is subject to IHT at 40%. The good news is that you can reduce the impact of IHT by putting in place various different nancial strategies during your lifetime. PASSING IT ON TWO BENEFICIARIES? AFTER THE NIL RATE BAND HAS BEEN ABSORBED, EACH ADDITIONAL POUND OF VALUE WILL BE TAXED AT 40%, LEAVING EACH BENEFICIARY WITH 30% EACH. HMRC: 40% SON: 30% DAUGHTER: 30% 10 GUIDE TO BPR

THE GOOD NEWS IS, YOU CAN REDUCE THE IMPACT OF IHT USING VARIOUS STRATEGIES DURING YOUR LIFETIME. SUMMER BUDGET 2015 UNDERSTANDING THE NEW NIL RATE BAND RULES The nil rate band for most assets is set to stay at its current level of 325,000 ( 650,000 for married couples and civil partners) until April 2021. An additional allowance, applicable only to the family home, will be phased in from April 2017, reaching 175,000 in 2020 ( 350,000 for married couples and civil partners). The upshot is that couples will be able to pass a 1m house to their children without paying IHT. The new relief is reduced by 1 for every 2 of value in excess of 2m, so no additional relief is available on estates worth in excess of 2.7m. ON THE UP AS HOUSE PRICES INCREASE AT A MUCH FASTER RATE THAN THE NIL RATE BAND, MORE PEOPLE WILL FIND THAT THE FULL NIL RATE BAND IS ABSORBED BY THE VALUE OF THEIR MAIN RESIDENCE. THIS CAN EXPOSE THEIR OTHER ASSETS TO IHT AT 40%. 350,000 300,000 250,000 200,000 150,000 100,000 50,000-1995 2000 2005 2010 2015 Nil rate band Average house price London & South East Average house price UK GUIDE TO BPR 11

INHERITANCE TAX BASICS CONTINUED... INHERITANCE TAX PLANNING THE MAIN OPTIONS There are a number of common IHT planning solutions that can be used alongside BPR-qualifying investments. This table summarises some of the main IHT planning strategies. A professional adviser will be able to help choose the best combination of these solutions for your own circumstances. BPR INVESTMENTS GIFTS (AND POTENTIALLY EXEMPT TRANSFERS) DISCRETIONARY TRUSTS LIFE ASSURANCE MANAGED ENTERPRISE INVESTMENT SCHEME INVESTMENTS HOW DOES IT SAVE IHT? Up to 100% relief after 2 years ownership. Value fully exempt 7 years after gift/ transfer. Transfers into trust IHT-exempt after 7 years. Pays out to cover IHT bill on death. BPR-qualifying up to 100% relief after 2 years ownership. ACCESS TO FUNDS WHEN NEEDED? Yes. Withdrawals will usually depend on investment manager being able to sell your shares. Dif cult to reverse if funds are needed in later life. Possible to structure the trust to retain a degree of control, but not simple. Not relevant. Policies can be cancelled to save cost of future premiums. Not usually. Typically held for at least three years and only sold at discretion of investment manager. RISKS Unquoted investments typically carry a high risk to capital. No investment risk. Varies according to how assets placed into trust are managed. No investment risk. Unquoted investments typically carry a high risk to capital. 12 GUIDE TO BPR

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INTRODUCING BUSINESS PROPERTY RELIEF 14 OXFORD CAPITAL ESTATE PLANNING SERVICE

BPR BASICS > BPR CAN PROVIDE 100% IHT RELIEF FOR CERTAIN KINDS OF ASSETS. > ASSETS MUST BE HELD FOR TWO YEARS, AND STILL BE HELD AT DEATH, TO QUALIFY FOR BPR. > IF PROCEEDS FROM THE SALE OF BPR ASSETS ARE REINVESTED IN OTHER BPR ASSETS WITHIN THREE YEARS (AND BEFORE DEATH), THE TWO-YEAR OWNERSHIP PERIOD IS NOT RESET. BPR ALLOWS CERTAIN KINDS OF ASSETS TO BE INHERITED WITHOUT BEING SUBJECT TO IHT. FAMILY BUSINESSES ARE A HELPFUL EXAMPLE OF WHY BPR IS NECESSARY AND HOW IT CAN WORK. If a family business was subject to IHT at the usual rate, it could be dif cult or impossible to pass the company from one generation to the next. The bene ciaries would most likely be forced to sell part or all of the business, to meet the cost of the IHT bill. BPR prevents this outcome, by effectively exempting qualifying businesses from IHT. WHAT KIND OF ASSETS CAN QUALIFY FOR BPR? The table below summarises the assets which can count as Business Property, and therefore bene t from reduced rates of IHT through BPR. These assets may also qualify for BPR when they are held in certain types of trust. TYPE OF BUSINESS PROPERTY BUSINESSES THAT DO NOT QUALIFY FOR BPR Generally speaking, for BPR to be available the company must be carrying out a real trade. If the company s activities are mainly dealing in stocks and shares, buying and selling land or buildings, or making investments in other companies, BPR will not be available. Not-for-pro t organisations are also excluded from qualifying for BPR, as are companies that are being sold or are in the process of permanently closing down. RATE OF POTENTIAL IHT RELIEF A sole proprietor's business or an interest in a business. 100% Unquoted shares i.e. shares not listed on a stock exchange. Shares controlling more than 50% of the voting rights in a listed company. Land, buildings or machinery that were owned by a deceased individual and used in a business they were a partner in or controlled. Land, buildings or machinery used in a business and held in a trust that the business has the right to bene t from. 100% 50% 50% 50% GUIDE TO BPR 15

INTRODUCING BUSINESS PROPERTY RELIEF CONTINUED... HOW CAN YOU INVEST IN BPR QUALIFYING ASSETS? Accessing BPR-qualifying assets does not have to involve owning your own business. A number of investment management rms have developed investment opportunities designed to help people access the bene ts of BPR. These investments fall into two categories... AIM PORTFOLIOS One quirk of the BPR rules is that shares in companies listed on the Alternative Investment Market (AIM) are considered to be unlisted, and can therefore potentially bene t from IHT relief of up to 100%. However, typically only around 70% of the companies on AIM qualify for BPR, and their qualifying status can change over time. Some investment managers offer an AIM IHT service, where they will invest your capital in an actively managed portfolio of shares, aiming to pick not just promising companies but ones which could qualify for BPR. ASSET-BACKED IHT INVESTMENT SERVICES These investments usually have names such as Inheritance Tax service or Estate Planning Service. When you subscribe to one of these services, you will become a shareholder in one or more unquoted companies which are usually directly controlled by the investment manager. The companies activities will vary, but often they will own and operate physical assets that generate regular and preferably stable revenues. Examples could include care homes, nursery schools or renewable power installations. These investments are designed to preserve the value of your capital rather than achieve signi cant growth, so they typically target modest annual growth. EIS AND BPR > ENTERPRISE INVESTMENT SCHEME COMPANIES WILL OFTEN QUALIFY FOR BPR. AS SUCH, EIS INVESTMENTS OFFERED BY SPECIALIST INVESTMENT MANAGERS COULD ALSO BE USED AS PART OF AN IHT MITIGATION STRATEGY. > HOWEVER, MOST EIS INVESTMENTS WILL RETURN CAPITAL TO THE INVESTOR, SOMETIMES AFTER JUST THREE OR FOUR YEARS. TO PRESERVE BPR QUALIFICATION, THE INVESTOR WILL NEED TO INVEST THEIR EIS PROCEEDS INTO OTHER BPR- QUALIFYING ASSETS.

WHY BPR INVESTMENTS ARE BECOMING MORE POPULAR FASTER IHT PROTECTION YOU RETAIN CONTROL OF YOUR CAPITAL SIMPLICITY NO INVESTMENT LIMIT Potentially exempt from IHT after just two years. Other strategies, such as lifetime gifting, take seven years to be fully effective. BPR investments are held in your own name and normally allow you to withdraw capital on request. However, usually accessing capital involves the sale of your shares, so the time taken to complete a withdrawal can vary. Most managers of asset-backed IHT services aim to return capital within 1-6 months. For AIM IHT services, the ease of selling shares from a portfolio will also vary, and can depend on a range of external market factors. You will be buying shares in unquoted companies no trusts or complicated legal structures are involved. There is no upper limit on how much can be invested in BPR assets. By comparison, transfers into certain types of trust can incur lifetime Inheritance Tax if they exceed the available nil rate band. RISKS OF BPR INVESTING All BPR investment managers should provide you with a detailed description of the risks associated with their investments, including the risks associated with the particular assets in which they invest. The common risks to consider include Investing in unquoted companies is inherently risky. Your capital will be at risk, and your shares could be dif cult to value or sell. The value of your investment can go down as well as up. You should only invest what you can afford to lose. The IHT bene ts cannot be guaranteed at the outset. BPR quali cation is not assessed by HMRC until after your death. You may need to wait to access your capital. Although you can request withdrawals from most BPR investments, it can take time for the provider to sell your shares. Withdrawn capital will lose its BPR status unless it is reinvested into other BPR assets. Withdrawals can also have Income Tax or Capital Gains Tax implications. Tax legislation may change. It is possible that legislation may change in a way that prevents your investment from qualifying for BPR. You may also nd that your investment takes longer to sell, because other investors are likely to want to sell theirs at the same time. This could delay you from putting your money into a different investment. GUIDE TO BPR 17

PLANNING WITH BPR 18 OXFORD CAPITAL ESTATE PLANNING SERVICE

THE BASIC PRINCIPLE OF INVESTING IN BPR ASSETS IS SIMPLE. THE INVESTMENT SHOULD BE EXEMPT FROM IHT, SO YOUR ESTATE SHOULD SAVE 40% OF THE VALUE OF THE BPR INVESTMENT. BUT THERE ARE OTHER POTENTIAL WAYS TO MAKE USE OF BPR INVESTMENTS. SOME EXAMPLES ARE HIGHLIGHTED BELOW. THE CHALLENGE HOW BPR HELPS ESTATE PLANNING WHEN YOU HAVE POWER OF ATTORNEY TRANSFERRING ASSETS INTO TRUST PRESERVING BPR AFTER THE SALE OF THE BUSINESS TRUSTEE INVESTMENTS Some estate planning strategies, such as lifetime gifting, require Attorneys to seek prior approval from the Court of Protection. Certain transfers into trust can be subject to lifetime IHT of 20%, if they exceed the nil rate band over a seven-year period. Not all company owners want to hold on to their business interests until death. But selling their business can expose the proceeds to IHT. Trustees often need to ensure assets are invested tax-ef ciently, including taking steps to mitigate IHT. BPR investments can be made without Court approval. Also, the assets remain with the Attorney s control, and can be accessed in whole or in part if money is needed for another purpose. BPR-qualifying investments of any value can be transferred into trust without triggering an IHT charge. The BPR assets must have been held for two years before the transfer takes place. Investing proceeds from a business sale into BPR investments can preserve the IHT shelter. An EIS investment could also be used to help mitigate Capital Gains Tax. BPR-qualifying investments held in a trust fund can be exempt from both periodic IHT charges and IHT on the death of the life tenant of the trust. GUIDE TO BPR 19

PLANNING WITH BPR CONTINUED... CHOOSING YOUR BPR INVESTMENT PROVIDER If you have a professional adviser, they will be able to help you decide which BPR investment manager s service, if any, is best suited to your needs. The checklist below sets out some of the things to look for: Does the risk pro le match your own appetite for risk and your ability to withstand capital losses? How soon will your money be used to purchase shares? This is important, because the BPR ownership period only starts once the qualifying shares have been bought. How quickly does the investment manager say they can return capital to you, should you need to withdraw funds? And how will they ful l your withdrawal requests? Do you understand the businesses you will become a shareholder of? Does the investment manager have a track record of successfully managing BPR-qualifying investments? What fees are charged by the investment manager? Do they seem competitive in comparison to other similar investments? 20 GUIDE TO BPR

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FREQUENTLY ASKED QUESTIONS 22 OXFORD CAPITAL ESTATE PLANNING SERVICE

WHAT HAPPENS IF I DIE BEFORE I HAVE HELD MY INVESTMENT FOR TWO YEARS? If you die before your investment has been held for two years, it will be assessed for IHT along with the other assets in your estate. In strict terms, the tax rules require BPR-qualifying assets to be held for two of the last ve years and to still be held at death in order to bene t from IHT relief. But the rules also allow one set of BPR-qualifying assets to be replaced with another. For example, if you held BPR-qualifying assets for 18 months before selling them, and then invested the proceeds in other BPR-qualifying assets, you would only need to own the new assets for six months (and still own them on death) to bene t from BPR. SHOULD I CHANGE MY WILL IF I PUT CAPITAL INTO A BPR INVESTMENT? Subscribing to a BPR investment does not create a speci c need to change your will. However, it is important to discuss your will with your solicitor and nancial adviser to make sure you are bequeathing your estate tax-ef ciently. If you have not already written a will, it is important that you consider doing so. CAN BPR INVESTMENTS BE HELD IN TRUST? Yes, BPR investments can be acquired directly by trustees, or transferred by an individual into a range of trust structures. CAN I ARRANGE A JOINT INVESTMENT? Yes, BPR investments can often be jointly held. DOES THE INVESTMENT NEED TO BE SOLD WHEN I DIE? After your death, the investment will pass to your personal representatives (the executors of your estate, if you left a will). They can arrange for the shares to be passed to your bene ciaries, or opt to sell the shares and distribute the sale proceeds. If the investment is held jointly, then it will transfer automatically to the surviving owner after the rst owner dies. WHERE CAN I FIND MORE INFORMATION? The Government s website includes some helpful information about all aspects of Inheritance Tax. You can nd it at www.gov.uk/inheritance-tax/ overview. The nancial research company Intelligent Partnership have produced a detailed report on the BPR investment industry. Your nancial adviser can request a copy by visiting www.intelligent-partnership.com/bprindustry-report-2015. GUIDE TO BPR 23

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