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Inheritance Tax – what does it mean for savings and investments?
What is IHT?
Inheritance tax (IHT) continues to be a worry for clients, with concerns that 40% of their taxable estate will go to HMRC in the form of IHT.
Common ways to mitigate IHT
The most common ways of mitigating such a tax liability have traditionally been to give away assets or transfer them into a trust. However, there are two issues with these options:-
- Firstly you have to survive for 7 years after making the gift/transfer for the value to be out with your estate.
- Secondly you lose control of the assets.
One or both of these can be a sufficient reason for some to opt against IHT planning. An alternative could be to set up a whole of life assurance policy, with the plan being written in trust for your nominated beneficiaries. This does not involve transferring assets outright or to a trust, and the policy would have to be underwritten. This would involve paying monthly premiums for the policy which could be costly as they are age and health dependent.
Another alternative – Business Relief
There is another way of potentially mitigating IHT, which involves no monthly outlay and you retain control of your assets. This is achieved by investing in a plan that qualifies for Business Relief.
The Government introduced Business Relief in 1976 and it was devised to enable owner-managed businesses to be passed down to the next generation either IHT-free or at a reduced rate. In 1996, Business Relief was extended to include investors with shares in qualifying businesses. There are some key eligibility criteria:
- These shares must be in unlisted UK trading companies, i.e. those not on a main stock exchange. Some qualifying companies are listed on the Alternative Investment Market (AIM).
- To qualify for IHT exemption the Business Relief qualifying shares must be held for a minimum of two years and at the time of death.
Investment risk consideration
It should be noted that unlisted shares are classed as a higher risk than those that are listed, and therefore are likely to experience higher levels of volatility. An alternative to an AIM portfolio is an Estate Planning investment that invests in businesses that qualify for Business Relief. This can be by investing in them or providing borrowing to them, with a number investing in asset backed companies (that have tangible assets such as property) as well as the energy sector, including renewables. These investments have more modest potential returns than AIM portfolios but also less volatility.
Do the benefits outweigh the risks?
Whilst these investments are classed as higher than average risk by the Financial Conduct Authority, they could still be attractive to those with an estate that will attract an IHT charge.
- They allow you to keep control of the investment,
- They allow access to the investment
- They provide the potential for the value to be out with your estate after just two years instead of seven.
These factors could stack up well compared to taking no action and suffering a 40% IHT loss on death.
To find out more about how our financial services team can help with IHT or other saving and investment planning visit our website here or contact Keith McIntosh at keith.mcintosh@raeburns.co.uk or call 01224 332463
