Business Relief assets held for two years prior to death and a surviving spouse – ‘double-dip’

whitman web insights doubledip

Most married couples have mirror wills so that assets are passed to the surviving spouse on first death. However, from a tax planning perspective, there may be a more efficient structure when Business Relief (BR) assets have been held for at least 2 years at the date of first death.

Rather than transfer BR assets to the surviving spouse it is worth considering an amendment to the Will (or deed of variation) so that BR assets are sold on first death and the proceeds passed, for example, to the next generation. This will crystallise the relief, enable future generations to benefit at an earlier stage and remove the potential risk of a future change to BR legislation. In addition, it will reduce the total value of the estate on second death so that a greater proportion of the residence nil rate band (RNRB) may be available. Note BR assets qualify as an exempt transfer and do not utilise the nil rate IHT band.

If the surviving spouse has surplus funds, they may wish to consider a further BR investment. Assuming they survive 2-years from the date of investment the family will have doubled the value of BR exemption whilst minimising the exposure to AIM and potentially maximising the value of the RNRB. Note the RNRB is only available on assets below £2.35m (£2.7m if the RNRB is transferred to the surviving spouse) and is tapered on assets above £2m. Unfortunately, BR is not deductible against the £2m RNRB threshold.

Investing for the next generation

In the example below, husband and wife jointly held £2m of assets including the family home valued at £1m (to be passed to direct descendants upon second death) and £1m of cash. In addition, the husband held a £200k AIM portfolio for 2+ years at the date of death. Under the mirror will scenario, the AIM assets are transferred to the wife without restarting the 2-year holding period and a £200k Inheritance Tax (IHT) saving is realised upon second death. As the total value of assets on second death are over £2m, part of the RNRB is tapered. Under the ‘double-dip’ scenario, the AIM shares are sold on first death and the proceeds are passed to the next generation. As the surviving spouse has significant cash, a new £200k AIM investment is made and the spouse survives 2 years. This scenario increases the total value of assets passed to the beneficiaries by £120k, without increasing the family’s overall exposure to AIM and maximises the value of the RNRB, as on second death the assets are at the £2m RNRB threshold.

Please note if BR assets were not held for the requisite 2-years on first death we recommend they are passed to the surviving spouse as this will not restart the holding period.

tax planning scenario for mirror wills

*A full breakdown of the IHT calculations is provided below.

This example is for illustrative purposes only and assumes there is no change in the capital value of the assets. The value of investments may fall as well as rise and your capital is at risk. The Whitman AIM IHT Portfolio Service should be regarded as a high risk, long-term investment and may not be suitable for all investors. You should only invest in the Whitman AIM IHT Portfolio Service if you have financial security independent of any investment made and we recommend that investors seek independent tax advice. The tax relief available may change at any time. Whitman Asset Management cannot guarantee that investments will qualify for Business Relief.

Calculation of IHT saving

 Mirror willDouble-dip
On first death  
Gross value of estate (incl. £2m of assets held jointly)£1,200,000£1,200,000
AIM BR assets (passed to children)Nil£200,000
IHT liabilityNilNil
Assets passed to surviving spouse£1,200,000£1,000,000
   
On second death  
Gross value of estate£2,200,000£2,000,000
Joint nil rate IHT band (BR assets qualify as an exempt transfer and do not utilise the nil rate IHT band)£650,000£650,000
Joint RNRB (tapered for estates above £2m)£250,000£350,000
AIM BR assets£200,000£200,000
IHT liability£440,000£320,000
Net value of estate£1,760,000£1,680,000
   
On a joint basis  
IHT benefit from BR£80,000£160,000
IHT benefit by maximising the RNRBNil£40,000
Combined value of assets passed to beneficiaries£1,760,000£1,880,000
IHT saving£80,000£200,000
IHT saving as a % of gross value of estate3.6%9.1%

Disclaimer: Although Whitman uses all reasonable skill and care in compiling this report, no warranty is given as to its accuracy or completeness. The opinions expressed accurately reflect the views of Whitman at the date of this document based on our views at such time regarding market conditions and other factors, may depend upon assumptions or projections that may not prove to be correct, and are subject to change. The opinions stated are honestly held, they are not guarantees and should not be relied upon.

The value of investments may fall as well as rise and your capital is at risk. We strongly recommend that you seek professional advice before you consider making investments is such securities. AIM has less stringent rules and AIM company shares may be less liquid than those companies listed on the London Stock Exchange.

Current tax rules and the available tax reliefs offered on investments into AIM-quoted stocks may change at any time, and there is a considerable risk that if the legislation changed in respect of these tax reliefs, then those stocks that no longer qualified for such reliefs would be subject to heavy selling pressure, potentially leading to significant investment losses.

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