This article is for professional investors only, and not intended for retail investors.
According to a survey conducted by Ingenious last year* the single most important factor that motivates financial planners and wealth managers to recommend a Business Relief (BR) qualifying service to clients is the speed of IHT efficacy. BR investments should be fully IHT-exempt after just 2 years, rather than the 7 years of a Potentially Exempt Transfer (PET).
This feature makes BR-based investments attractive to clients looking for proactive estate planning solutions that allow them to retain both access and control of those assets, and even more so for those clients who may be concerned about their longevity. As clients frequently make estate planning decisions in later life, it is also likely that more clients will live for two years following an investment decision than for seven.
These drivers have led BR-based investment services to such popularity that now well over £1.5Bn per annum is invested into these solutions**. As a result, a wide variety of fund managers’ services have proliferated to support demand.
However, independent research into these solutions has so far understandably tended to focus on just one of the two major elements of a BR-based service: the underlying investment service and how that may impact a client’s outcome. Due to the common assumption that all BR-based services will produce full IHT efficacy after the same 2-year holding period, the other element, the actual estate planning impact of these services, has been largely ignored.
However, even if a “2-year plan” does have a better chance of success than a “7-year plan”, the 2-year wait may itself still be taking a significant risk with your clients’ outcomes. And should the clients
’ die inside that two-year window, their desired outcomes simply aren’t being achieved when their beneficiaries are being hit with a significant IHT bill after their death. And much as we don’t want to face it, we all run the risk of dying within the next two years, regardless of our age or current health status.
So, what can be done to mitigate this clear risk and ensure we deliver on the client’s outcomes as intended?
For the last five years or more there have been some BR-based services that set up a 2-year life insurance policy alongside the investment service to cover the specific risk of the client dying within those first 2 years. If an investor dies, the life policy will typically pay out 40% of the amount invested into the service, neatly covering the IHT liability and making the investment IHT-effective from day one. However, with these services the client must pay extra fees to cover the costs of the insurance. So, whilst this helps negate the financial impact of mortality within the first 2 years, it will compromise the investment return and therefore the final value that will be passed on to the chosen beneficiaries.
This poses a dilemma to advisers and their clients. If they decide to protect themselves from the impact of IHT if they die within 2 years, they will likely compromise the return they can pass to the beneficiaries; but if they don’t pay for the life cover, they run the risk of IHT fundamentally impacting their loved ones. As a result, many decide to take the gamble and not purchase the cover.
By contrast, a BR-based service that includes life insurance as standard at no extra cost to the investor could deliver this immediate IHT efficacy without compromising on cost or investment performance – an obvious choice for investors and advisers alike.
This kind of service has never before been available on the market – until now. IEP Apex, launched in March, combines Ingenious’ proven investment strategies with life insurance at no extra cost to eligible investors. IEP Apex will ensure that in those cases where investors die within the first 2 years and therefore fail to make Business Relief status, their investment will have grown in line with the performance of the Ingenious IEP services and it will settle the IHT liability via the insurance cover, thus preserving the ultimate value of the investment. Equally, those investors who see out the initial 2-year period will be no worse off as they won’t have paid for insurance thereby protecting their investment returns.
For investors and advisers alike, IEP Apex offers a unique and reassuring way of meeting their estate planning goals immediately in one simple service via accelerated day one IHT cover (post share allotment) without having to incur expensive insurance that hits investment returns.
*Based on a webinar with 340 attendees
** TER – June 2021