Matthew Newton Wealth Management Ltd

Senior Partner Practice of St. James's Place Wealth Management


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Aim carefully

27 March 2015

Individuals looking to reduce an Inheritance Tax liability must be wary of the risks of different investment solutions

It’s the time of year when people look to make the most of their annual ISA allowance. It goes without saying that the tax advantages of ISAs are significant, but if you’ve built wealth on the twin pillars of Income and Capital Gains Tax (CGT) efficiency, you could be just as interested to ensure money escapes Inheritance Tax (IHT).

‘Death duty’, once synonymous with the wealthiest estates, is nowadays applied to the estates of the not-so-prosperous. The IHT nil rate band, set at £325,000 per person, has not increased since 2009. Although there were suggestions that the latest Budget might include measures to ease the tax burden, those hoping for a rise in the threshold were left disappointed. As such, the number of estates hit with the 40% tax charge on amounts over the nil rate band, is predicted to rise to one in ten by 2018/191.

Whilst free from CGT and further liability to Income Tax, ISAs have not typically offered an escape route from IHT. But a change in legislation has altered the picture, in theory at least. Since 2013, people have been able to invest their Stocks & Shares ISAs into companies listed on the Alternative Investment Market (AIM), the smaller companies’ arm of the London Stock Exchange. Some AIM-listed businesses qualify for something known as Business Property Relief (BPR) - a government dispensation introduced to make sure families don’t have to sell their businesses to pay IHT bills.

But BPR doesn’t just apply to family-owned enterprises. If you don’t own a small business that qualifies for BPR, you can invest in one and mitigate IHT on the shares. The only proviso is that you hold the shares for at least two years. It means you have the potential to alleviate a taxation triple hit – Income Tax, CGT and IHT.

Too good to be true?

Before rushing to transfer your ISA investments to AIM-listed shares, it’s imperative to know that these investments come with a stringent health warning: performance is very precarious. As Tony Müdd, Divisional Director at St. James’s Place, points out, AIM shares are volatile and there are liquidity risks. “For those reasons, they are generally considered unsuitable for people in later life, when there tends to be less capacity to withstand losses,” he adds.

If the objective of an ISA is to grow your investments in a tax-advantaged environment, and enjoy the proceeds in your own lifetime, then investing in some particularly risky BPR-qualifying AIM-listed companies just to mitigate IHT, could be a case of the tax tail wagging the investment dog. Müdd explains that there are specialist IHT products that can help older people pass on their wealth. “It is possible to invest in BPR-qualifying investments outside of AIM that are lower risk. The portfolios are managed for capital preservation, in keeping with the needs of elderly clients,” he says.

Early start

Other opportunities for minimising an IHT bill are available, but it’s important to seek professional advice before making any decisions. Trusts*, life assurance, and reducing your estate by giving money away, can make things easier for the people you leave behind, but as with much in financial planning, the earlier you start the better. The annual gifting exemption is one such example. Individuals can make gifts worth up to £3,000 in each tax year and these are exempt from IHT on death. Married grandparents with a potential IHT liability could, for instance, gift a total of £6,000 to their grandchildren’s Junior ISAs each year, as an alternative to funding their own ISA investments. This would equate to £108,000 over 18 years and a potential IHT saving of £43,200. With the end of the tax year looming, now could be an ideal time to consider making the most of this year’s gifting allowance, if you haven’t already.

Most investments count towards the value of your estate, as does property, cash and even jewellery. So if the total value of your estate is likely to exceed £325,000, (£650,000 for married couples) it’s worth taking time to discuss your options. Getting professional advice will mean you have a clearer path for leaving a tax-efficient legacy, and ensure that you are making the most of the tax breaks available to you today.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. A BPR investment represents a much higher risk than investing in a larger, well established listed company or on, say, the FTSE All Share Index. A BPR investment is inherently more illiquid than investing in larger, well established listed companies, and as a result you may be unable to sell them at a point you wish to. The high risk nature of BPR investments means you could get back significantly less than was originally invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

*Trusts are not regulated by the Financial Conduct Authority.

 1 Source: Office for Budget Responsibility, March 2014


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