What investments can I use to limit my inheritance tax liability?

Having built a successful business, I recently sold it for a large profit so I could retire and have started looking at how I could reduce my inheritance tax bill. I’ve seen a few different options such as putting money into an investment fund focusing on companies expected to qualify for business relief; or I was considering setting up a trust for my two adult children. Are there certain assets or investment vehicles I could use to minimise my liability, and what sort of due diligence should I be doing? 

Kate Johnson, partner in the private client team at Wedlake Bell, says congratulations on the sale of your business. Now that you have reaped the fruits of your labour, you are understandably concerned about the large inheritance tax (IHT) bill that could arise on your death. As you are probably aware, inheritance tax is charged at 40 per cent over the nil-rate band of £325,000, unless any reliefs or exemptions apply.  

Under the current rues, if assets in your estate qualify for business property relief or agricultural property relief, inheritance tax relief will be available, provided certain conditions are met: most notably, that you have owned the assets for long enough before your death. Usually two years is required for business property and seven years for investment in agricultural property.

As you have identified, there are investment funds specifically targeting 100 per cent business property relief. If you have owned these investments for two years before your death they would qualify for full relief.

They comprise of shares in companies listed on the Alternative Investment Market (Aim). Some of these will be household names, but many are relatively unknown and can represent volatile or higher-risk investments. Shares in unlisted companies also qualify for relief. In either case you should carefully check what you will be investing in, the investment risks you are taking, whether the investments are suitable for your circumstances and consider how much of your wealth should be invested in such assets. For example, such investments often become less suitable in later life. 

You should ensure your will is appropriately drafted to utilise the business property relief on your death, so you are not reliant on your spouse or civil partner still qualifying for relief, or indeed relief still being available, at the time of their death if they survive you.  

You mention that you are also considering setting up a trust for your adult children. Assets settled on trust will be outside of your estate for inheritance tax purposes. Trusts can provide control and asset protection, but keep in mind there is a cost for such protection. Trusts are subject to a 6 per cent IHT charge every 10 years and at the time of settlement there is a 20 per cent upfront IHT charge unless the assets themselves qualify for relief at those times. 

Other options you may wish to consider to reduce or manage your IHT bill would be life insurance, outright gifts, leaving 10 per cent or more of your estate to charity to qualify for a reduced 36 per cent rate of IHT on the remainder, or a family investment company that can be set up in such a way as to pass investment growth to the next generations outside of your estate while you retain access to as much of the initial capital for as long as needed.   

I am approaching my two-year anniversary at my job, and I have heard noises that the firm might cut some jobs, with those who joined less than two years ago most vulnerable. With the fixed term of my mortgage approaching, I would be in a poor financial position if am let go. Do I have no legal rights if I am made redundant?

Chris Deeley, employment associate at law firm JMW Solicitors in London, says as the law stands, you would not gain full protection against unfair dismissal as an employee until you reach two years’ service. This does unfortunately mean it is considerably more straightforward for your employer to make you redundant. This would save your employer from significant costs because conducting a fair and thorough redundancy process can be very time consuming. If you have under two years’ service you will still be entitled to notice pay and any other contractual entitlements up to your termination date, but you will not be entitled to any statutory redundancy pay.

The lack of unfair dismissal protection means that you could be let go for almost any reason, although there are a few exceptions — such as for dismissals for discriminatory reasons, or those done to punish an employee for whistleblowing or for alleging that the employer has infringed their statutory rights.

For example, your employer should not use attendance records as a factor to determine redundancy, because this could disadvantage those who have needed to take more sick leave than others because of a disability, and so could constitute disability discrimination. 

If you are made redundant before your two-year anniversary and decide to take legal action, the burden before an employment tribunal would be on you to show that the true reason for your dismissal was a prohibited one, which can be a very difficult task. Your employer can simply point to your lack of rights, meaning you will be cheaper and easier to dismiss. In most cases, barring where explicit evidence to the contrary exists, that will probably be enough reason to justify a lawful dismissal.

If you reach two years’ service, however, the story will be different. You will gain unfair dismissal rights, meaning your employer would need to follow a full and fair redundancy process to lawfully dismiss you for redundancy. This protection can kick in slightly early — if you are dismissed with immediate effect within one week before you reach the two-year mark, you can still benefit from unfair dismissal protection, as had you been given the one week’s notice required by statute, you would have crossed the two-year mark and gained those same rights. 

The new Labour government has pledged to reduce the qualifying period for unfair dismissal protection, possibly making this a “day one” right. This was included in The King’s Speech. Legislation to make this proposal into law is yet to be tabled, but if it comes into force, it will probably force employers to reconsider how they deal with redundancy situations, as well as other dismissals. 

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to [email protected].

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