Utilising leasing and lending as a key estate planning solution
Belinda Thomas, Partner and Head of Sales at Triple Point writes that the Autumn Budget came and went without any notable implications for estate planning.
However, with the recent emergence of the Omicron variant, there is undoubtably still a level of economic uncertainty that could see the government seek to increase tax revenues and, in doing so, turn their attention to inheritance tax (IHT).
As the UK government continues to grapple with the ongoing effects of the pandemic, funding will have to be sourced and IHT could be a prime target. Figures from HM Revenue & Customs cite that the average bill for those paying IHT has already risen 6 per cent in the past year to GBP210,000 and is set to rise further. Indeed, the decision to freeze the IHT threshold for five years in the March Budget is already predicted to cost Britons nearly GBP1 billion more by 2025/26 on top of the amounts already being paid and double the number of people forced to pay the tax. As advisers strive to help their clients navigate this continued economic uncertainty, there are various estate planning solutions that could help.
One of the most flexible options for those looking to mitigate the effects of IHT is through business relief (BR). BR enables straightforward and fast relief from IHT and, crucially, is done in the client’s name so there is no loss of control of their capital. If an investor has held shares in a qualifying business for a minimum of two years and holds them at the date of death, then the shares qualify for BR and are not liable for any IHT.
BR has evolved since it was first introduced in 1976. Initially intended to help family businesses survive following the death of the owner, successive Governments expanded the rules to encourage more people (regardless of whether they run a business) to invest in ‘BR qualifying assets’ which are deemed vital to the UK economy. There are now a variety of strategies that clients can choose which qualify for BR. One such option is investing in companies that provide funding through lending and leasing. These companies can finance a wide range of organisations from larger institutions, such as NHS Trusts, through to smaller firms around the UK.
One type of lending is direct lending and, historically, this has only been administered by banks and large financial institutions. However, over the last two decades, it has become increasingly open to a wider group of investors and market participants. Investing in direct lending offers an asset that is not correlated with equity markets providing returns that are unaffected by wider volatility. This option can allow clients to mitigate their IHT liability while also supporting SMEs and the public sector - two sectors which would particularly benefit from support as we emerge from the pandemic.
Of course, there are other options that advisers can consider for IHT estate planning solutions. For example, creating trusts has long been a go-to for financial advisers. However, trusts can often require specialist advice when being set up, which can incur additional costs, and take seven years before they are fully exempt from IHT. As a result, with its two-year qualification period BR offers clients flexibility and speed when planning for the future.
Clients have a number of options if they are looking to include leasing and lending investments in their portfolios. Triple Point’s Estate Planning Service serves as one example and comprises of two different strategies. The Navigator Strategy focuses on providing funding to SMEs and offers higher returns of 4-6 per cent per annum whilst the Generations Strategy provides funding to the public sector and corporates with a return profile of 1.5-2.5 per cent per annum. Considering how stretched the UK healthcare system has been throughout the pandemic, utilising the Generations Strategy can provide the NHS with timely access to critical equipment. For example, in April 2020, Triple Point provided a regional county hospital with desperately needed ventilators. This is a process which can often take months but, after the lease was verbally awarded to Triple Point the ventilators were supplied in under five hours. Through utilising a single strategy or a blend of both, investors can access an asset class which generates reliable returns whilst achieving 100 per cent relief from IHT on the amount invested after two years. The flexibility and control mean that leasing and lending strategies offer benefits for not only investors who are seeking critical IHT relief, but the economy as a whole.