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AIM for flexibility in Inheritance Tax planning

Taxation has existed almost as long as civilisation itself, with earliest records dating back to 3300 BC. Throughout history there have been countless ways of raising tax, ranging from the fairly obvious to the downright peculiar.

In Ancient Rome for example, human urine was so highly valued for tanning and laundering that the Emperor Nero chose to tax those collecting it from public urinals. Closer to home, we have had taxes levied on windows, bricks, candles and even beards.

Modern inheritance tax (IHT) dates back to 1894 when the government introduced estate duty, a tax on the capital value of land. When first introduced it was intended to affect only the very wealthy, but over recent decades more families have found themselves caught in the net, mainly due to big rises in property prices and investments.

In the last six tax years over £30bn was paid in IHT, with the Office for Budget Responsibility forecasting 30,400 estates will be liable for IHT in 2020/21. And with both the Nil Rate Band and the Residential Nil Rate Band frozen for a further five years, IHT receipts are forecast to rise to £6.6bn in 2025/26.

As a consequence, the need for financial advice on estate planning, and inheritance tax planning in particular, has become ever greater. Events of the past eighteen months have brought mortality fully into focus for many of us, providing further opportunity for financial advisers to demonstrate the value of their advice in helping clients and their families to plan ahead.

There are a number of well-established tax planning solutions to mitigate IHT, each with their own pros and cons. These include gifting, the use of Trusts and life assurance.

Another solution, which has been growing in popularity in recent years, is the use of Business Relief by investing in the shares of companies listed on the Alternative Investment Market (AIM).

The AIM market celebrated its 25th anniversary last year and has been a major success story for the UK, helping nearly 4000 smaller companies raise capital to fund growth and development. Familiar names include ASOS, Boohoo, Fever-Tree and Jet2. Subject to stringent qualification rules, some AIM company shares may qualify for 100% Business Relief. If an investor holds the shares for at least two years, and held them at death, qualifying shares will not be subject to IHT.

All claims for Business Relief are assessed by HMRC after death, so while there is no guarantee that an AIM stock will qualify, one stock failure in a portfolio of AIM shares would not fail the whole portfolio. And as with any form of tax planning there is always the risk that tax rules may change in future.

Aside from IHT planning, AIM investment also offers the prospect for capital growth over the longer term, although the usual risk warnings for smaller company investment apply.

AIM investment for Business Relief offers a wide range of IHT planning options that can help clients in a number of ways.

  • In contrast to making a gift and having to survive seven years, the two-year survival requirement may be attractive to those facing the prospect of a reduced life expectancy, or who are in later life with inadequate protection from IHT. Unlike other estate planning solutions, medical underwriting is not required.
  • The investor retains access to their capital. Keeping control may appeal to clients reluctant to gift assets and who wish to make capital withdrawals if and when required.
  • Most ISA investors are familiar with the benefits of tax-free income and growth, but less well known is that after death their ISA will be included in their estate. With many having accumulated substantial ISA pots over the years, the prospect of a large IHT bill may come as a shock. AIM investment is permissible in an ISA, so switching or transferring ISA holdings into an AIM IHT portfolio adds the prospect of IHT relief to the favourable tax advantages already available.

Other more specialist IHT planning scenarios further demonstrate the flexibility of AIM investment for Business Relief, for example:

  • Where a business qualifies for 100% Business Relief and is sold, the relief is lost and the owner may be left facing an IHT charge on the cash proceeds. The relief can be maintained however if the proceeds are reinvested into new Business Relief qualifying assets. So long as this is done within three years of the sale, the two-year ownership period for qualification is not reset.
  • An attorney holding Power of Attorney can find IHT planning difficult as this generally requires Court of Protection approval. Approval is not required however for investment into Business Relief qualifying assets, such as an AIM IHT portfolio. Access to capital is allowed should any withdrawals be required to meet for example, the costs of healthcare or care home provision.
  • Settling Business Relief qualifying investments into a discretionary trust can help mitigate IHT charges which may otherwise be incurred. Depending on the circumstances, this can mean no IHT charges on entry or exit, no periodic charges, and no charge on death.

Recent years have seen increasing popularity in the use of AIM IHT portfolios on third-party wrap platforms. These can prove attractive to investors wishing to consolidate AIM investment alongside other holdings as well as being cost efficient.

While it won’t be right for every client, the versatility of AIM investment for inheritance tax planning makes it an appropriate solution for a number of client scenarios. And as a lifetime investment, it can enhance adviser relationships not just with existing clients but with the next generation too.


About the author

David Holmes, Head of Business Development, Thorntons Investments

David has over thirty years’ industry experience in a variety of customer service, technical and business development roles. He joined Thorntons Investments in 2016 and as Head of Business Development is responsible for the marketing and distribution of Thorntons Investments AIM IHT Portfolio Service and MPS portfolios to Intermediaries and Wealth Managers.


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