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When Power of Attorney is in place

John Oliver
14th January 2016

Inheritance Tax (IHT) is the second most resented tax in the UK. It is currently payable at the rate of 40% on an individual’s estate that exceeds the ‘nil rate band’, which is currently £325,000. Estates which comprise a family home and few other assets can incur a large tax liability.

There are many options available to those who wish to mitigate their estate’s IHT liability. Trusts and gifting are the most common strategies employed, but both take 7 years in order to be fully effective. For clients who are elderly or unwell, this is often too long a timeframe.

Business Relief, or Business Property Relief (BPR) as it is commonly known, is a UK IHT relief that was introduced by the Government in 1976. It was designed to allow business owners to pass on businesses to beneficiaries without incurring an IHT liability. In 1996, it was made more widely available to private investors and now allows any qualifying investment held for at least two years, and at the time of death, to benefit from 100% IHT shelter. Most unquoted, UK registered companies will qualify for this relief. This two year timeframe makes this form of planning the quickest way of sheltering assets from IHT.

Another area when BPR could be of use is when Power of Attorney (POA) is in place. Let’s consider the following situation.

Mrs Jones is 60. Her son has Power of Attorney (POA) over her financial affairs and due to her poor health he can make financial decisions on her behalf.

Gifting and trust planning may not be possible in this case, because a number of restrictions exist to avoid attorneys abusing their positions. One of the main rules states that attorneys cannot give away access to a donor’s (Mrs Jones) funds, without applying to the Court of Protection for approval. Trust work and gifting both involve a change of ownership and it would be difficult for Mrs Jones’ son to successfully put either in place. It may also be unsuitable given the 7 years time frame and Mrs Jones’ health status.

Mrs Jones’ son could, however, invest on her behalf in a BPR qualifying company in the form of a portfolio of companies. Since the investment remains in her name, he has not changed the ownership for the funds and since a BPR investment only requires 2 years to become effective for IHT purposes, it may be the most suitable option.

Unquoted companies are usually riskier than those listed on a major stock exchange. Whilst there are a number of risks associated with investing in unquoted companies, many investment companies offer BPR investments that target capital preservation. These investments involve companies with long-term, index-linked and stable cash flows.


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