Case Study: Inheritance Tax Planning – Sold a business within the last three years

The problem

Two years ago John sold the freight business he had built up over the previous three decades. Since then he and his wife Anne have been travelling to parts of the world they had always dreamed of seeing, including Hong Kong, Australia and California. But John still has just over £1 million from the sale of the business.

Sadly, John’s health has not been good recently. He had a serious operation in his 60s and the underlying problem has now recurred. While his doctors seem hopeful, John has realised he needs to plan for the worst.

In particular, he wants to be sure he can leave his £1 million savings to his three daughters without them having to pay more inheritance tax (IHT) than they need to. As John can’t be confident he will live another seven years, we agreed traditional forms of estate planning, such as gifts and trusts, are not a practical option.

A potential solution

When John still had his company it would have qualified for business property relief (BPR) if he had died, meaning HM Revenue & Customs (HMRC) would have given it exemption from IHT. However, now that his money is no longer in the business, IHT is a worry. The good news is that HMRC allows a three-year window, during which the money can be invested back into BPR-qualifying assets and immediately regain its preferential IHT status.

As a result, John has decided to follow our recommendation and put £1 million into a portfolio which invests in unquoted companies qualifying for BPR. Usually an
investment of this type takes two years to become BPR-qualifying, but, because of the three-year ‘replacement’ rule, John’s investment will be IHT-exempt from day one, assuming he still holds it at death.