It's time for me to air a concern I've had for quite a while. It concerns tax planning using products specifically designed for the job. This contrived tax planning makes me slightly nervous. I'll explain…
Contrived tax planning
As a chartered financial planner, I often have representatives of investment houses and product providers looking for an hour of my time to show me their latest offering, in the hope that I will consider their product when advising my clients. I am very careful how much time I give to this, as time is always at a premium, but it is important to keep on top of what the industry is making available.
In recent years there has been, it seems to me, an explosion in the kinds of products specifically designed to harness the tax advantages of Business Property Relief. This important relief is explained in this video, and is designed to help small businesses pass from generation to generation without inheritance tax implications.
How BPR products work
Business Property Relief provides that for qualifying assets, there will be no Inheritance Tax payable, as long as:
- you hold the asset (usually shares in a business) for at least two years, and
- you still hold them at the date of death
The key to a shareholding being qualifying is that the business must be properly trading. In other words it can't be just a company that holds cash or other investments. It has to trade in some way, buying and selling things to make a profit.
And so there are many products which have been created, to make sure these rules are being satisfied. Companies are set up to take advantage of certain market areas, such as shipping, smart meters, and solar energy, though the government subsidies here are now much reduced.
HMRC now seems to be stamping on lots of the subsidised trades which are held by these shell companies, which I think is a good thing. I always worried about how long the Revenue would sanction already heavily-subsidised trades being held within super tax-efficient wrappers.
Always know what's underneath
Now I am not saying that these products are in any way dodgy or suspect. The proof of that is that at Jacksons Wealth we have recommended them to clients on occasion. I am certain that any product brought to market has been checked and signed off by HMRC before the brochures are printed.
So what's my point? Why am I nervous about them? Are these products really guilty of contrived tax planning?
I believe that you should always know what is going on underneath the financial products you buy. At their core, BPR products involve you buying shares in one, unlisted company. This is always a risky trade, no matter how low risk the marketing material says the product is.
One could argue, correctly in my view, that the tax savings are such that even if a chunk of the money was lost, there would still be a benefit. But the fact remains – you buy shares in one company, and that company folds or becomes illiquid in some way, your entire holding may be at risk.
So be careful. Never let the tax-saving tail wag the investment dog. Always understand what is at the heart of any investment you make and consider how it fits into your overall plans.
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