Kathryn (00:07):

Hello everybody. We are on season eight episode 11 and today is going to be a little bit of different type of podcast episode. I’ve not done one of these before and hopefully it’ll be useful, but I’m going to start doing some sort of deep dives into certain products and I would maybe advise on them things that are a little bit outside of the norm. And we’re going to be starting this one off with Business Property Relief insurance. This is the Practical Protection Podcast.

(00:44):

So everybody, I’ll just need you to bear with me a little bit today. As most of you all know, I do have little ones and my youngest hasn’t been particularly well, especially over the weekend. So I’m running on not much sleep over the weekend and this is going to be quite a technical podcast. It’s not going to be too long. And don’t worry, I’m going to try and keep the jargon at bay as much as possible. We are be talking about business property relief insurance and there are certain taxations in regards to that. As always, I will start off with the sort of the disclaimer that I am a protection insurance specialist, so I’ll be involved in the arrangement of life insurance to protect against the business property potential tax that somebody might face. But in terms of the actual calculations establishing how that would work in terms of someone’s full financial plan, if they were going to be doing some of the activities that could trigger this kind of tax relief, that would usually be sat with a full financial planner or an accountant and I would work alongside them just to provide the insurance side of things.

(01:47):

So it’s probably a good idea to start off by talking about what this kind of relief is. So basically there are certain ways that if you have bought into a company certain arrangements you might be able to get IHT relief on the amount that you’ve invested within a company. And there are certain rules in regards to this. So there’s certain reasons why this is in place. It can be a really useful aspect of somebody’s financial planning, but you do need to be very, very mindful of how it works in terms of that person’s financial plan, but then also to the family, to the estate and the way that you are arranging the policies. And it’s going to be a little bit of a tag team situation between what happens in regards to the purchases and in terms of some trusts that aren’t, I talk about trust usually obviously from a life insurance aspect of things there will be that aspect of it in the life insurance, but there will be the need for the other types of trusts as well as say full financial planners would be involved in and lawyers to just do what needs to be done to do that magic.

(02:54):

On the other side of things, so the times that people can get this relief on the potential inheritance tax is if they have made a purchase usually within shares within a business and they survive that purchase by at least two years. So the time that the taxation might come into play, the IHT tax is if somebody buys the property, sorry, the business shares and they die in those first two years. So that doesn’t happen with every type of business purchase. So there are some really specific rules. So the main ones are if you’ve bought share in a company that isn’t listed on the stock exchange or any kind of stock exchange, that would be somewhere where there could be some IHT tax in those first two years that we can maybe get some relief say IHT relief after the first two years have passed, but we can put some insurance into, provide some protection against any IHT in those first two years.

(03:55):

It could be that you have bought shares in what’s known as a listed alternative investment market, which as I say, I’m protection insurance only. So that’s gone right over my head in terms of jargon. So anybody listening to this who thinking she’s already doing jargon, I’m right there with you growling at myself. But that can also happen in terms of some types of individual ices that people have. So some people might not necessarily be fully aware that that is what’s happened now that could be through just their own choice as to what they’ve been doing in terms of the ISA market. It could be that it’s been done for them through accountants or financial planners or suggestions that way and they’ve just kind of took it on themselves but don’t necessarily know all these beneficial aspects that they can have in terms of this IHT potential relief.

(04:42):

And there’s also certain types of businesses such as partnerships that can sometimes have these benefit too. Now in those three scenarios you would potentially get a hundred percent business property relief. So that means that after the first two years there might not be any IHT due on those purchases. There are some other assets that can potentially get about a 50% tax relief, but I’m just going to end up listing lot’s and lots of different things and I don’t think any of us are going to be grateful to me if I just start listing going forwards and forwards. So it is something to have a good look at. And one thing I always suggest is, and this is when I do my training calls as well, is if you have something like this, go on Google and put in business property relief insurance and type in an insurance name and see what comes up.

(05:28):

There’s some shows that usually have really, really good guides on them and you can go on, there might be PDFs, there might be a page or sometimes case studies on them and it can really, really break it down and make it so, so helpful. If you try it with one insurer’s name and it doesn’t work, just try another one at some point you will fall onto ones that can be incredibly useful. I do tend to find that myself that Royal London legal and General IC tend to have some really good technical blogs that they’ve done. So they’re always a good starting point. I’m sure many others have that too. Those are the ones that I’ve come across when I’ve been doing some of my initial searches, the ones that come up top on Google. So you might be wondering when the business property relief would come into play, I like, well how are you going to be doing this?

(06:13):

How often is this going to happen? And what’s quite important as an advisor is with anything is spotting where these things happen and people don’t realize. So when I’m doing advice in terms of protection insurance, people don’t necessarily realize the need for income protection a lot of the time. That’s kind of like the last thing that somebody realizes or there could be a need for life I insurers protecting. Something that they don’t realize is select certain gifting. So gifts are quite interesting because you’re allowed to give in the UK up to 3000 pounds as a lump sum to someone each year without it going into potential gift amounts. But obviously over that amount or to multiple people, the multiple people think and have different aspects to it. So I won’t go too much into that, but you can start going into gift territory and a lot of people just don’t see that people will maybe give their kids money towards a deposit for a house and things like that and they don’t realize that they’re potentially putting a gift in place that could be incurred tax for the children.

(07:06):

So anyway, going back I see I’ve gone on little ta, sorry. So in terms of the business property relief, it can quite easily happen potentially within family businesses. So obviously between partners we don’t tend to have IHT obviously depends upon rules and obviously whether or not they’re married or not and civil partnerships. But generally it can happen. And what people don’t often think about is that in the UK a lot of business, about 80% of businesses in the UK are small firms. So this is happening quite a lot with people not realizing it or not seeing that more the sense of there is that taxation there, which is the worry, which is where I step in, but also the potential business opportunities. Are they seeing this? Do they know that that’s there? Do they also know that they might not have to face IHT on certain things after two years?

(07:58):

It all came about this business property relief specifically to support family businesses because what people were finding was obviously many, many years ago is quite a few decades ago is that IHT was suddenly being required on in a sense the inheritance of the business and obviously if they’ve bought different things between each other, depending upon who was inheriting it and the rules and businesses were having to close or potentially sell parts of them to meet the IHT bill. So BPR as it’s called, was brought in to try and help those businesses to say well actually this is a family business, it’s staying within the family. Obviously it might have gone to children, it might have gone to siblings, it might have gone to cousins or anything like that. And ultimately we don’t want to be risking people’s livelihoods by the fact that they’re just keeping something going.

(08:51):

Obviously helping the community, helping the business in general in the uk. And the important thing as well to just know when you are looking at things like this, and again if you’re just an insurance, this’ll be a little bit outside of your realm of advice and obviously very much being very clear myself in terms of there’s limits as to what I can do in advice to this in terms of what I’m allowed to do because I am just qualified on the insurance side, but things that are a qualifying asset under business property relief aren’t included in the nil rate band for somebody. So that’s why it’s such an effective financial planning tool for quite a lot of people because once that’s in place, once the two years have gone, it isn’t going to be held within the estate in regards to the way that the IHT is going to be calculated.

(09:38):

But obviously you do need a really a full financial advisor to be involved in such plans if that is something that someone is considering. So when you are doing from an insurance point of view, business property relief insurance, ideally you’re going to be speaking with the accountant, hopefully a financial advisor as well who’s already been brought in because the thing is accountants are fantastic, really, really good, but they don’t always know the technicalities of certain parts of what we are doing. Similarly, just like financial planners, dunno, all the technical aspects of accountancy, we’re all specialists on our own areas and what you can find with some really small firms as well is that they might not even be using an accountant, they might be trying to do it themselves. They might have a bookkeeper who’s different from an accountant as well and they might not be familiar with all the legalities and the technical aspects that are happening in this side of things.

(10:31):

They might well be so good on them if they are. But you just really want to make sure if you approach this is who is being involved, what kind of accreditations do they have and ideally have some kind of a conversation so that when you are talking about the insurances, the way that this work, the way that your knowledge stands in terms of the IHT aspects of things that everybody’s sounding like they know it at least to the level that you know it and hopefully they know far more than you and in terms of that and they’ll be able to teach you something which would be wonderful for the next person. So going back to the way that things are shares have to be held for at least two years to be free of the IHT requirements. Okay? So with business property relief, what we’d want to see is the cross option agreements or some kind of agreements in place between the shareholders.

(11:23):

Now there’s a couple of ways of doing agreements between shareholders. If you are familiar with doing shareholder insurance, you’ll tend to find this, people like the cross option agreement or they might like what’s known as a buy and sell agreement, sorry, excuse me for that. They each have their benefits in different ways, but in terms of the business property relief, a cross option agreement is probably going to be the best one very much for specific reasons that I will go into. The reason being is that when we do the insurances with the business property relief insurance, which would be life insurance that lasts for two years, that’s 40% of the value of what’s been purchased because IHT would sit at 40% at the current rules in the uk and this is being recorded in early of 2023. No, I’ve already lost year, excuse me for that 2024, we are beginning of 2024.

(12:22):

Honestly, it’s going to be one of those mornings for, isn’t it? Anyway, so we’ve got a cross option agreement and the reason that we’re going to want to do that in terms of the life insurance and the way that these are all being set up is the fact that the cross option agreement means that HMRC look at it and they don’t see it as being a legally bound agreement at the time of death. So with a cross option agreement, either party can enact it. So in terms of the sale of the shares, so the company can say, right, well you bought these shares or your loved one bought these shares, we want them back. We were enacting the cross option agreement, you have to sell them to us. But the family can also turn and go, hang on, we’ve bought these shares, our loved ones now died, we want you to buy these shares off us.

(13:17):

So either party can trigger it at either point, but it’s not legally binding that it has to happen. So HMRC can consider shares bought through that kind of an arrangement to be possible to have the business property relief aspects of it. So that means that we could potentially not have IHT and the parties might choose to do the agreements or they might choose not to. They might decide that they just want to keep everything as is, but in all likelihood it’s probably going to be that the cross option agreement is enacted. Now the problem that we can have is where there’s a buy and sell agreement that’s been made with the shares, and obviously this isn’t to do with the insurance aspects of it, this is just purely to do with what’s happened with the shares. So this is where the shareholders have from the start entered a legally binding agreement which states that upon death the other shareholders must buy the shares and the estate must sell them.

(14:13):

Now this is different because HMR sees this as legally a binding agreement to sell before death. So at point of death there’s a legal agreement in place, which means that there can be no business property relief on that agreement and IHT will be due depending upon certain timeframes. So what we need to do is just be really conscious when we are for myself, if somebody’s come to me and they are wanting to arrange this kind of agreements with their shareholders, I’m immediately going to be saying, where’s the accountant? Where’s the financial advisor? And I’m going to be looking at it and saying, right, well what agreement has been put in place because then we to be really careful as to what we’re doing going forward. And certainly at that point with the buy and sell agreements that there’s no doubt about it, there must be life insurance in place to cover that.

(15:04):

And we’re explaining with the case study just how little that can cost us. Well, so we’re going to be really, really on top of things. If somebody is coming to us and they’re wanting to do that, we’re going to bring in experts and make sure that they know what they’re doing on all the share agreement purchases and all that side of things so we can then follow up with the insurances. And if somebody is already done this, then again we’re going to be looking out for it and saying you’ve done that, we need to ensure what type of agreement did you have in place? If there’s a buy and sell agreement, then I mean I’m going to bounce to say it insurance wise and that is what I do that they should have it no matter what. But the buy and sell agreement, there’s just no messing about.

(15:40):

They really do need that insurance in place as quickly as possible. So the other thing to just bear in mind as well though, and this is something again, it goes out of my area, but it’s something that I need to be aware of as an insurance advisor and it comes down to that whole thing of being really seen as an expert in your field. One of the things that we tend to find, I tend to find, especially in terms of sign postings, a lot of people signpost people to me as a specialist, which is obviously wonderful, is fantastic. I sign people out as well for private medical insurance, for pensions, for investments. And some people can be really guarded about that because they’re thinking, well, does that make it seem like I’m not good enough or that I’ve not got enough knowledge or skillset or that this person over there is much better than me?

(16:22):

And the answer is no. So if you ask somebody that’s in that position, please don’t think that because the way that I see it is if you went to a solicitor and they said to you, right, we’re going to do this. We’re going to put this one in place and we’re doing this over there, but you actually need that kind of person to do that. So I’m bringing them in to do it. You wouldn’t second guess them. The majority of people wouldn’t second guess a solicitor. You just know that they, they’re really good at what they do. They’re legal, they’re very professional, very well-trained experts in their field. We’re exactly the same as advisors and you just need to really bear that in mind when you are sort of chatting to people to sort of go, look, this is what I do, but you need an expert in this.

(17:00):

It’s not that you’re saying that you are not good enough or that you don’t have the knowledge or anything. You are just saying, I’m so specialized here, this is what I do. They’re super specialized there and that is what they do. So it works and hopefully if you ever wanted to, so I chat about how that works and not necessarily signpost to me or anything, but just chat about how that works, how to approach those conversations with people. Please feel free to obviously get in touch with me. Now the thing with business property relief as well is that it’s really essential that certain trusts are in place. And I’m not talking about life insurance here, I’m talking about other types of trusts and it’s all to do with the long-term financial plan of the person and their family. So this is where you really need the financial planners and the solicitors involved chat to people, they think they’ve done this, they think they’ve done it that way, they’ve this person involved.

(17:50):

You’re seeing a gap. And again, if we talk about consumer duty, even though we’re not special in certain areas, we should be able to try as best as possible to see certain gaps and signpost people to say, look, I really do feel you need a little bit of extra here and you should be speaking to somebody who can just fulfill that bit. And then when you’re doing your reports and everything, you can say hand on heart that you’ve done the best possible you’ve said to this person, I don’t feel that this is necessarily set up or I think you just need someone with a really specialist eye to keep a look at it. So with business property relief and things like that, there is going to be the use of specific will trusts that should be say, overseen by someone qualified in that area and it’s to make sure because there’s different types of trust that are going to be needed, but it’s going to make sure as well that what we’re wanting this to do, if we’re using business purchases as part of our financial plan, that it’s going to do it what we want to do.

(18:45):

So as an example, let’s say somebody’s bought shares in a company and they’re trying to get this business property relief. They’re hoping that they can get to a stage where there’s not going to be IHT on that bulk of money that they’ve invested in a company. Well, the problem can be if it’s not put within a certain trust, but it’s just going to be inherited by their spouse. So it’s just going to go back into the total estate anyway. And then that means obviously when that person passes, then in terms of the children and so on and so forth, we’re just going to, we’ve eradicated the whole purpose of what the business property relief plan was. So we just really want to make sure the right kinds of trusts have been doing, there are different types of trusts. I’m not going to pretend for seconds that I know how the trust in those kinds of instances would work, but I will just go into the life insurance side of things a little bit and obviously how the trust would work there.

(19:38):

We’re going to want a two year life insurance policy to cover the IHT risk for something that, as I say is a qualifying asset. So just be conscious that as well that we’re talking about all this, you need to feel confident that it is a qualifying asset. If it’s not a qualifying asset, then we’re going to need something that’s probably much more than two years to be run for. But that’s again why you’re probably having a good chat with an accountant and a financial advisor just to clarify and feel confident yourself as to how it’s going to be treated. So I’m going to take an example of somebody who’s 42, they’re a non-smoker and they’re buying 120,000 pounds worth of shares in an unlisted company. So an unlisted company basically means that it’s not on the stock exchange. So again, lots of your smaller firms won’t be on the stock exchange.

(20:25):

And when we say smaller firms, that’s still anywhere roughly easily up to 250 people. So we say small, but they’re still quite big, possibly even far more than that as well. But you can also have very, very small companies as well. There’s just two people. So the potential IHT bill on this for their loved ones is about 48,000 pounds if they die within the first two years of purchasing those shares. Now, and that’s obviously again, based upon the current rules, which I remind myself is early 2024 when I’m doing this. So with this situation, the person had a slightly high BMI and we knew that they’d be facing a premium rating that’s referred to as a plus 50%. Now when it comes to premium ratings, just in case you’re not familiar with this kind of things, plus 50% basically means that they’re going to increase the premium by in a sense, well 50%.

(21:17):

So the premium in itself, the basic premium is what’s known as a hundred percent. So you would take half of that a hundred percent and add it on top. So essentially it’s kind of 150% that’s being paid. So whatever the basic premium is, let’s say it’s five pounds, you would times it by 1.5 to then get your 50% loading, which would be seven pound 50 in a sense in the end. Hopefully that makes sense. I have done other podcasts where I’ve gone into sort of the way that these kinds of things work. Please do feel free again to reach out to me if you want me to go through that. But essentially take the basic premium as value one and then whatever your percentage rating is, you do the 1.5 for 50%. If it’s 75% rating, you do times by 1.75. If it’s a hundred percent rating, you times it by two.

(22:07):

It’s one of those ones with the percentages. It actually, for some reason when I first started advising, that was the thing that really, really confused me. I just could not get my head around the way the percentages worked. So if you’re in that position the same as me at that time, please don’t worry, it does come with time. So with this person, it was 48,000 pounds of life insurance over two years and that became six pounds per month. So I just want to be very clear, it’s literally six pounds. So over two years, 288 pounds to protect s, the 48,000 pound tax bill, it’s well worth it. And especially in this situation with the high BMI accepted straight from application, it should take maybe 30 minutes to get it all sorted. And the last thing I’m going to say is obviously we’re going to want to make sure that this is in trust.

(22:53):

So this is different to the other trusts which are the business and property trusts. This is the trust to do with the life insurance. Now I’m going to let you in on something which I may have said in previous podcasts, but I’m sure that all of you’ll be once you’re here, it’ll be incredibly grateful that you’re doing sit in my team because of my compliance rules. But essentially if there is an online trust for my team to use, with the exception I think of three insurers who I have to say have awful, awful online trust systems, I have made them aware. But if it’s an online trust system that is easy to use, which is the majority of insurers, my team, if a life insurance would have a fail on their advice if they didn’t do a trust, and there’s a specific reason for this and I’m sure everybody’s thinking, oh my word, she’s so harsh or Oh, I’m really glad to say that we don’t work for her.

(23:43):

And possibly some clients, people compliance are probably there clapping in the background and going, yes, go for it Catherine. So reason being is that when we do life insurance, there needs to be an insurable interest for life insurance to be relevant. So that means that a person’s going to be financially worse off. Now the whole purpose of this is to prevent somebody facing an HT bill. So we know that there’s somebody who’s going to be facing an HT bill, so what is their name? It’s very easy early on in the conversation, and I say easy, it takes time to change mindsets and your approach when you’re chatting to somebody and you’re establishing the need, right? You need this insurance. Who would inherit this? Who would get the HT bill? Oh, it’d be my daughter, right? Okay, what’s her name? What’s her date of birth? Because I’m going to do a legal form.

(24:28):

That means that if something happens to you, she gets the money quickly and directly to her. I’ve never had anybody say to me, I don’t want that. And again, it’s kind like positioning it again, if you need to kind of channel you in a solicitor in a sense of this is what’s happening, we’re not missing about this trust is happening with this life insurance. The other thing as well in terms of going forward in terms of ongoing service for your clients is if something does happen to this person and somebody rings you up to try and get support with the insurance, how are they going to get for your data protection? We have so many data protection rules now, so eventually you could get there, but if you’ve already got their name and date of birth and they already have details of the person, obviously their parents, who’s obviously passed, you can really quickly get through data protection.

(25:12):

It solves any kind of negativity that might happen, any kind of barriers that might be perceived to being to you, being able to support them, things like that. So we’re just going to do that. We’ve got an online trust. Most of them will just ask for name, date of birth, maybe address, maybe address and date of birth seems to be interchangeable depending upon which insurer and the percentage that they’re going to be receiving. So you really want to make sure that that is going to be happening. Do bear in mind as well as if there’s a very significant estate that we’re probably with these trusts going to want to do the terminal illness benefit is gifted to the trust a lot of the time we would, again, this comes down to individual compliance and what everybody’s in compliance officer says to them, for the majority of people who aren’t anywhere near IHT levels, you’d probably want to what’s known as retain the terminal illness benefits.

(26:05):

So that means if something happens, they would receive the money early to help them financially during that last year or so of their life, which is obviously probably going to not be the most comfortable of times for them. But when we’re talking about IHT, when we’re talking about gift planning, anything like that, this business property relief, we want to make sure that the terminal illness benefit is gifted. You don’t want that person to be receiving the money themselves. Again, it’s just going to eradicate everything that’s happened and what you exactly are planning for. It’s often a tick box within a trust and as an advisor, you’re probably going to be helping them with that trust. And it’s really, really important. If you don’t do that, as I say, you could just be eradicating everything that you’ve been trying to do and set up for them.

(26:50):

Really keep an eye as well on certain insurers trust in terms of what can be considered potential beneficiaries or the actual beneficiaries that might be auto chosen. Because again, sometimes it might go to a partner rather than it going to the children. And so there was one time I had to do, I was doing some gift planning for somebody and I’d had to use three different insurers for different reasons. And every insurer I had to use a different trust because one of them wouldn’t let me gift the terminal illness benefit, which just wasn’t appropriate. Another one automatically had their partner, married partner as the first automatic beneficiary, which I couldn’t have happened because it had been gifted to children. So it’s all these things you must be super, super careful of because when we are looking at this kind of thing, in some ways it can be quite simple.

(27:46):

40% of the liability, two years life insurance, brilliant. But that is sometimes where the danger is. And the danger sometimes with protection insurance is that it can seem so simple from the start and when you’re just kind of given an overview of it, if you’ve not been given a lot of training in these things, but you must be keeping an eye on those trust, you must be establishing who’s been involved, who’s been giving the advice, is there any advice happening there? Have they had the advice in terms of the property trust and everything that needs to happen? Bring someone in to offer support, but don’t just leave it. If you see a gap, make sure that you know what you’re doing and don’t leave it anywhere. So that’s pretty much it for the business Property Relief Insurance at the moment. Just to give you an overview, and I’m going to be doing this with going forward as shareholder protection, key person cover, things like that, relevant life insurance.

(28:35):

I get so many comments about relevant life insurance and different things of what you can and can’t do. And so basically on that one, there’s just going to be for the love of God, please don’t do this. And hopefully that’ll make sense when we get to it. But next time I’m going to have Matt ran back with me and we’re going to be doing a deep dive into arthritis and what that can mean in regards to your insurances. So hopefully you’ve found this useful. As always, if you would like a Ccpd certificate, please visit the website, practical from protection.co uk and thanks to our sponsors, the Okta members who give that CPD function to us, really looking forward to seeing you all next time. And thank you very much for listening. Bye.