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