By Neville Pereira,
Financial Services Director, Lubbock Fine Financial Solutions LLP
One of the biggest issues with planning to save IHT is striking a fine balance between using assets for one’s own benefit and gifting them to save IHT at 40%. With the considerable increase in property values and with a nil rate band for inheritance tax currently frozen at £325,000, the tax slice that Her Majesty’s Revenue & Customs is taking has increased considerably over the years. In the tax year 2012/2013 some £3.7 billion was paid in IHT, in many cases unnecessarily.
Most of us do not like the idea of our families losing 40% of our assets to IHT upon our death, although without any real planning this can be the unfortunate reality.
There are a number of ways to limit our exposure to IHT including:
- Using your exemptions appropriately
- Gifting assets
- Insuring against a liability
- Establishing either a discretionary or an absolute trust
- Utilising and investing into schemes that benefit from Business Property Relief (BPR)
In this article we focus on schemes that benefit from BPR by specifically investing into either an Enterprise Investment Scheme (EIS) or Alternative Investment Market (AIM) shares. Currently, assets that qualify for 100% BPR will be free of IHT after
only two years of ownership. Importantly, one can retain the asset and upon death it can be passed down to the next generation free of IHT. Interestingly, if the asset passes to the spouse on death within the two years, the spouse adopts and extends the previous qualifying periods.
100% BPR applies to the following assets:
a. Property consisting of a business or an interest in the business
b. Securities of an unquoted company that the transferor controls
c. Any unquoted shares (but not other securities) in a company
Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS)
EIS is a government-led programme designed to provide a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies. Qualifying companies must be unquoted. They must not carry on certain trades including inland commodities, future shares, securities or other financial instruments. Property based trades are also excluded such as property development, hotel management, the operation of nursing homes, farming and forestry. EIS tax advantages are considerable and include income tax relief of up to 30% of the amount invested into the EIS qualifying companies, together with capital gains tax (CGT) deferral for the life of the investment. The BPR investment also qualifies for IHT relief after only two years.
A Seed Enterprise Investment Scheme (SEIS) is also administered by HMRC and offers tax relief to people who invest in shares in a qualifying company. The aim of the scheme is to make it attractive to put money into companies at an early stage, when such companies often find it difficult to raise money in traditional ways. Because the SEIS is set up to attract money for very new companies, which are judged to be riskier than more established businesses, investors get income tax relief of 50% of the amount they spend on the shares. When the shares are sold after the qualifying holding period of three years, the investor does not pay CGT on any profit they have made.
Investments into a SEIS are considered to be a very high risk investment.
Alternative Investment Market (AIM) shares
An estate can also claim BPR on certain shares that are traded on AIM and benefit from 100% IHT relief after two years. AIM was launched in 1995 and now there are over 3,000 companies raising more than £60 billion in new and further capital fund raising.
Unlike many alternative tax schemes, the clients retain access to this investment. Therefore, if circumstances change and access is required to the holding, shares can be sold, although obviously the resulting proceeds will lose BPR exemption and possibly may also be subject to CGT. It is also now possible to utilise AIM shares in Individual Savings Accounts (ISAs) making an investment ordinarily free from income and CGT now also free from IHT. This would not be the case with a normal stocks and shares ISA invested other than in AIM stock.
Investments into AIM stock are volatile and these investments could form a satellite holding as part of a balanced portfolio of assets.
It should also be noted that investments into both EIS and AIM are considered high risk and clients need to be comfortable with earmarking a proportion of their assets into these types of investments.
For further information please speak to your contact partner or to me directly - 020 7490 7766 or email me here.
This article is for information only and professional advice should be taken in advance of any changes to your financial affairs. HM Revenue & Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. Tax advice and National Savings & Investments are not regulated by the Financial Conduct Authority. Lubbock Fine Financial Solutions LLP is an appointed representative of Financial Ltd, which is authorised and regulated by the Financial Conduct Authority.