Is renewable energy an inheritance tax opportunity?
How renewable energy can be an inheritance tax (IHT) opportunity
Renewable energy, also known as clean energy, is created from replenishing resources such as the sun and wind - and the sector has become increasingly popular among investors looking for growth, income and IHT products.
The UK government kickstarted investment into renewable energy as it looked to reduce greenhouse gases sent into the atmosphere.
Further substantial growth is required over the coming decades to enable the government to meet its legally binding net-zero target by 2050.
For example, industry analysts believe that the installed capacity of solar assets needs to double by 2030 and double again by 2050. This presents a huge investment opportunity estimated to be at least £15.6bn (in today’s money).
As well as providing opportunities for investment growth, renewable energy investments can play a part in services that could reduce your inheritance tax bill - as we explain below.*
How does the renewable energy sector work in the UK?
Renewables provide around a third of the UK’s energy, predominantly created through wind, solar and biomass. Below is a brief summary of the main types of renewables.
The UK is a world leader in wind energy, with around 8,800 turbines onshore and 2,300 offshore, according to figures from industry group RenewableUK. They create enough energy to power the equivalent of 18 million homes.
The solar energy market is also growing fast. Figures from Solar UK show around one million solar panel systems are installed on homes around the UK and a growing number of businesses are installing solar panels on the roofs of their buildings.
What opportunities can renewable energy offer investors?
Some of the funding driving the renewable energy market comes from specialist private investors, such as Armstrong Capital - which manages the solar strategy of the ProVen Estate Planning Service - through investment trusts or investment platforms, such as ProVen.
Because the sector benefits from a huge amount of government support and incentives, investors may receive stable dividend yields that can help their portfolio keep pace with inflation.
Many of our own investments at ProVen are benefiting from the government’s historical feed-in-tariffs (now closed to new projects). Feed-in-tariffs are long-term contractual agreements put in place by the government - lasting up to 25 years - to pay producers of renewable energy a guaranteed, above-market rate for the electricity they generate.
At ProVen, we have consistently generated strong total returns, including the regular dividends paid. For the calendar year 2021, this total return was in excess of 8.2%.** These dividends can be withdrawn by investors as income. In fact, we are one of the few inheritance tax planning companies that does pay returns through dividends.
What about inheritance tax?
Investing in companies that qualify for Business Relief means you may be exempt from paying inheritance tax (IHT) on these investments.*
To qualify for IHT relief, your investment must have been held for at least two years at the time of death.
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There is no way of confirming with HMRC whether a business qualifies for Business Relief. But specialist investment firms that have been in the sector long enough can be confident their investments qualify.
Through ProVen’s Estate Planning Service, we offer our investors the opportunity to invest in trading companies focused on the UK solar energy sector that are expected to qualify for Business Relief because they fit the government legislation.
What about giving money away?
There is another way to mitigate inheritance tax, which is offered as part of the solar strategy of the ProVen Estate Planning Service through investing in renewables, and that is by giving away the money you receive from dividends.
Rising UK house prices and living costs has led many experienced investors to consider gifting money to relatives to give them a financial boost.
Through the option of taking quarterly dividend pay-outs from the ProVen Estate Planning Service, clients can either keep the money for themselves, or pay it to a family member or loved one. Dividends of less than £2,000 a year are free of tax.
UK inheritance tax rules mean gifts out of income are exempt from any future inheritance tax. This means you don’t have to worry about the seven-year rule, where IHT may be due if you die within seven years of giving a financial gift.
To make sure any money you give away is free of IHT, it is important to check that any Business Relief investments offer a classified income option. Just because an investment produces a regular income does not guarantee it will be treated as a form of income.
Why does inheritance tax matter?
The majority of people in the UK will not have to worry about inheritance tax as it is only charged on estates worth more than £325,000 per person. If you are a homeowner and plan to leave your property to direct descendants, you could get a further allowance of up to £175,000 (known as the residence nil-rate band (RNRB).
Couples that are married or in a civil partnership can combine their allowances, meaning their estates can be worth more than £1m before inheritance tax is due. Your estate will include everything from the family home to ISAs and other savings (although pensions are separate from your estate).
But once IHT kicks in, there is a hefty tax charge of 40%. And if your estate is worth more than £2m, the amount you can claim for the RNRB tapers by £1 for every £2. This means that once your estate hits £2.4m, the RNRB is lost completely and spouses only have a combined allowance of £650,000.
So if you have a significant amount of wealth, it is important to look at ways to make your portfolio as tax-efficient as possible. This is why investing in companies that qualify for business relief, which are therefore exempt from inheritance tax, is becoming more commonplace.
If your estate is worth more than £2m, it is also worth looking at ways you can reduce the overall value to avoid losing the main residence allowance. This is where some clients consider giving away money from income to loved ones.
ProVen, managed by Beringea, is one of the UK’s leading providers of tax-efficient investment opportunities - managing more than £300m on behalf of around 10,000 retail investors. Armstrong Capital, a leader in equity and debt funding of UK based solar projects and other energy businesses, leads the solar strategy of the ProVen Estate Planning Service. Please contact your financial adviser to find out more, or call us on 020 7845 7820.
The contents of this article should not be construed as investment, tax, financial or legal advice. We recommend that you seek advice from a regulated Financial Adviser.
* UK tax rules and regulations are subject to change, and such changes may be retrospective. Your ability to obtain tax reliefs will depend on your personal circumstances.
** Remember, when investing, capital is at risk and past performance is not a good indicator of future results.