Due diligence and compliance - what do advisers need to know?

Financial Advisory

Financial Advisory


The Findings, Winning Advisers, Tuesday 13 October 2015, Tylney Hall, Hampshire

time-investments-jpg.JPG        rennison-consulting-jpg.JPG           

Sponsor introducing: Simon Housden, Time Investments

Facilitated and written by: Roderic Rennison, Rennison Consulting


Business Property Relief (or BPR) is a tax relief provided by the UK Government as an incentive to invest in trading businesses, which in turn support the UK economy. It was first introduced in 1976 to protect owner-managed businesses from having to be broken up to pay Inheritance Tax bills. Investors in unquoted shares of trading companies benefit from 100% relief from Inheritance Tax provided the shares are held for two years and at the time of death.

A number of companies have developed discretionary management services that allow investors to access Business Property Relief to mitigate their Inheritance Tax (IHT) liabilities and they have been designed to offer investors a faster solution to IHT, within a simple and flexible structure. Subject to any changes in legislation, it leaves investors in control of their money, which can be accessed should they need it.

Most invest in asset-backed trading businesses, which in turn qualify for BPR.

Why recommend BPR?

The principal “driver” is the wish to mitigate Inheritance Tax where clients have assets above the Nil Rate Band and IHT is likely to be an issue that cannot be effectively addressed by other IHT planning strategies.

Fundamentally, there needs to be a need for BPR and before an adviser recommends a BPR solution, he or she should carry out a detailed fact-find to confirm amongst other things:

  • Are the basic foundations of IHT planning in place: Wills, Gifting in place?
  • Is any other existing IHT planning in place?
  • Are assets and/or investment strategies diversified?
  • What is the client’s attitude to risk and capacity for loss?
  • What is the client’s knowledge and experience of investments?
  • What is the risk of doing nothing?
  • What is the requirement for income?
  • What is the requirement for liquidity?
  • The proposed percentage of the client’s assets  to be placed into BPR

When BPR may be a possible solution

Before considering BPR, there are a number of alternative options that should be considered first. After analysis, they may not be suitable for a variety of reasons. Examples include:

  • Trusts - Unlikely to survive the necessary 7 years
  • Gifting - Unwilling to sacrifice control of assets
  • Whole of Life - Expense, or age / ill health prevents cover
  • Power of Attorney (POA) takes action - Restrictions over what they can invest in
  • Do nothing - Assets and the house will result in a hefty IHT bill. The client may not want the family home to be sold to pay the bill

The role and responsibilities of the adviser

 Advisers must assess if BPR is an appropriate option and in doing so, need to not only carry out a detailed fact-find but also:

  • Test the understanding of client regarding the proposed solution and satisfy themselves that the clients has full capacity to make an informed decision
  • Consider involving other professionals who can advise and counsel the client – for example, their solicitors and accountants
  • Consider involving the client’s relatives – in particular their children

Some clients may not readily agree to the second and third bullets above but care needs to be exercised as Inheritance Tax planning is complex and there may be facts that the adviser is not aware of that other professionals and relatives can assist with.

Selecting the appropriate BPR Provider

If after carrying out the appropriate level of due diligence, BPR is an appropriate solution, then an adviser will need to select an appropriate BPR provider that meets, amongst others, the following criteria:

  • Financial stability
  • Liquidity
  • Appropriate underlying investments
  • Asset backing
  • Previous track record
  • Fees
  • Service

The use of external due diligence providers

Many advisers use external sources of reference but ultimately, they the advisers are responsible for the choice of BPR scheme provider.

The FCA is currently carrying out a themed review into the due diligence processes that advisers undertake when selecting providers and services and so there needs to be a robust process in place for not only selecting external sources of reference, but also demonstrating that there is an ongoing monitoring process as well.

What more can advisers do to ensure their advice processes are robust?

One other action to consider is to look at Financial Ombudsman’s Services (FOS) judgements relating to BPR scheme complaints. They will highlight what in the opinion of FOS represents poor practice that could give rise to a successful complaint being made. Advisers who take note of particular recurring themes or issues are likely to reduce the likelihood of complaints arising that lead to them being upheld by FOS.