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AIM portfolios and Inheritance Tax planning
In some ways Inheritance Tax (IHT) is quite a simple tax to avoid. Give away assets, survive for seven years and you’ve done it. However whilst many people are happy to give away the actual assets and all personal benefit from them (which is essential for the planning to work successfully) they are often reluctant to give away control. The donees may often be young, disabled or financially improvident, so there is usually good reason for the concern.
The classic way to give away value but not control is by using a trust, usually with the donor remaining as a trustee. However the government seems to take the view that all trusts are attempts at tax avoidance and therefore accord them special, often harsh, tax treatment. You can make absolute gifts to whatever value you wish and, assuming that you survive for seven years, there will be no IHT. However if you use a trust and the value of the gift is more than the IHT threshold (£325,000 in 2009/10) there will be immediate IHT at the rate of 20% of the excess. It will also be seven years before the threshold ‘recovers’ and can be used again. This severely limits the use of trusts in such circumstances.
One way around the problem is to put into the trust assets which have a zero value for IHT purposes because of reliefs and exemptions accorded to them. The main such exemptions are for business and agricultural assets. Most people do not run a business or own a farm (and probably would not want to make them the subject of a gift anyway). However the business property relief (BPR) also applies to shareholdings in companies on the Alternative Investment Market (AIM) or investments in the Enterprise Investment Scheme (EIS – apologies, the acronyms are increasing!).
Such investments get 100% IHT relief after you have owned them for two years, although three years is necessary also to get Income Tax relief on EIS investments. At that point they can be put into trust up to any value and would also be exempt from IHT if held in an estate at death.
Investing in AIM or EIS can be a tricky business, as obviously there is little point in saving IHT up to 40% if one loses 50% of the investment value in the process. It is therefore very important that investments should be made on the basis of advice from suitably qualified independent financial advisers. Though investments can never be guaranteed, appropriate share selection by experts can minimise the risk, and some schemes offer built-in guarantees.
If you are interested in such schemes please contact us. Not only can we help you establish the trust documentation, but we can also introduce you to appropriately qualified financial advisers.
Michael Rapps 8 October 2009