The older we get, the more we start thinking about how to pass on our wealth to the next generation, and, crucially, how to minimise the size of the inheritance tax (IHT) bill that we’ll leave behind.
There are a number of ways to distribute our wealth while we’re still alive, by setting up trusts, and making use of gift allowances, for example. But some of them, like gifts, require that they are given at least 7 years before you pass away, otherwise they could still add to the tax bill. What if you still find yourself with significant assets late in life, and want to find another way?
Rebecca says, “I recently helped a couple in their 80s with an increasingly common problem. With a relatively large estate including property and an extensive portfolio of investments, they were looking at a potential IHT liability of over £1m. They were fully aware of this, and had taken steps to reduce this liability, but had found their options to move things around rather limited. Due to their age, they couldn’t be sure that the 7-year rule for gifts would necessarily apply.
“A large proportion of the assets they wanted me to look at was held in ISAs. We were able to move those funds into a portfolio of AIM investments while retaining the tax benefits of ISAs. If these assets are held for a period of just 2 years before death, they will not be subject to IHT which could mean a saving of £100k for this family.”
What are AIM investments?
AIM stands for Alternative Investment Market which is a subset of the London Stock Exchange, originally created to help smaller companies raise capital before being promoted to the ‘main market’ often simply called ‘the FTSE’. In practice many well-established companies listed on AIM choose to stay there meaning that there is a wide range of investment opportunities – not just smaller companies.
Shares in AIM-listed companies can qualify for Business Relief (BR), which in practice means 100% relief from IHT. Care is needed because not all AIM-listed companies will qualify for BR. It is also important to recognise that AIM investments are usually more volatile than more traditional markets meaning that it isn’t right for everyone’s risk appetite.
Why hold AIM investments in an ISA?
It is generally well understood that ISAs offer opportunities for tax-free income and growth but they will usually form part of your estate for IHT purposes. Switching your ISA funds into AIM investments can
mean that in addition to the usual tax advantages, they are not subject to IHT at the time of your death. And in contrast to making gifts or using trusts, you have retained ownership of the ISAs.
Rebecca continued, “When you’re looking for ways to minimise your inheritance tax liability it can pay to be creative. You need an IFA who will look in the round at all your assets, and think ‘how can we use what the client already has to reduce the potential IHT liability and remedy the issue quickly without relying on the 7-year clock?’ This solution worked in this case because it also offered a way for the client to retain control, and access to their money.”
Whatever your wealth succession challenge is, like most things in life, the best way to achieve it is to plan for it, with the help of a professional IFA.
An experienced IFA will be able to look creatively at your assets and advise on your options. At Talis IFA we take the time to understand you, your aims and what’s most important to you, before looking at the numbers. That allows us to research the right solutions for you.
If you have an inheritance tax question, get in touch. Click here to find a Talis IFA