Inheritance Tax receipts are rising – there is a simple solution
Tax savings and enhanced investment returns
Figures released by HMRC in 2021 showed that Inheritance Tax (‘IHT’) receipts reached £4.1 billion between April and November 2021, around £600 million more than the same period in 2020 – that’s tax being paid on wealth, that has already been taxed before!
Following his March Budget, Chancellor Rishi Sunak also chose to freeze the Inheritance Tax allowances for five years, thereby dragging more families into the Inheritance Tax bracket as house prices and stock markets continue to increase and inflation starts to climb.
While it is hard to avoid Inheritance Tax on property, for those with investment portfolios, notably in ISAs, there is a simple solution – a portfolio of Inheritance Tax qualifying AIM shares.
What is AIM?
AIM is the London Stock Exchange’s market for smaller companies. It has developed into the world’s most successful and established market for dynamic high-growth companies.
While AIM is designed to help smaller companies access capital from the public markets, it now includes many substantial £ billion companies – Fevertree Drinks and Jet2 are both AIM companies.
Want to hear more about AIM? Watch our webinar where we consider what 2022 might have in store for AIM and whether the compelling tax reliefs might be at risk.
You can watch the webinar from our Educational Webinars page here
Benefits of Business Property Relief
AIM shares which qualify for Business Property Relief (or Business Relief as it is now called) and held for at least two years do not form part of the estate for Inheritance Tax calculation purposes and can be passed on after death tax-free. This means AIM shares can be used to mitigate against the 40% potential inheritance tax bill which could apply to these assets.
The two-year clock starts ticking from the time you make the investment in qualifying shares. Subsequent investments start a new clock ticking so accurate records must be kept on different durations. If you sell after two years, you have three years to reinvest the proceeds back into qualifying shares for the benefit to continue without starting the two-year clock again. And lastly, you must be invested at the point of death.
AIM for outperformance
Of even more importance to those considering moving from an existing equity portfolio to AIM, is that many dedicated AIM IHT Portfolio Services (not just our own!), have been producing outstanding results over recent years, significantly outperforming UK main market indices – our own portfolios have delivered outstanding results since 2004, as you can see in our factsheet here.
AIM ISAs and ISA transfers
AIM ISAs have been around since 2013, when the Government changed the rules to allow investors to hold AIM-listed shares within an ISA for the first time. This means qualifying business property relief AIM shares can be held within a tax-efficient stocks and shares ISA wrapper. AIM ISAs get the same tax breaks as other ISAs: any growth or income from the shares is tax-free.
The maximum amount you can pay into an AIM ISA in any given tax year is determined by the ISA allowance at the time as set by the government. For the current tax year 2021/2022 this is £20,000.
An investor can transfer their full current year’s ISA subscriptions or all or part of previous year’s ISA subscriptions into an AIM ISA. Transfers within an ISA should not create a CGT event.
Our page here explains more about the AIM ISA.
Platforms
IHT solutions used to only be available directly with investment managers, with advisors forced to direct assets off their designated wrap platform in order to access these.
Adviser platforms have now evolved to let clients invest in individual stocks, including those listed on AIM, and even allow Discretionary Fund Managers (DFMs), such as Fundamental Asset Management, to manage portfolios of AIM stocks on platform on behalf of clients.
This means you can offer AIM for Inheritance Tax planning solutions to your clients and keep their assets in one place, thereby retaining the benefits a platform has to offer.
With a platform, clients benefit from reduced dealing, product, custody and investment costs as well as giving them access to investment products they would not normally be able to access by going directly.
Advisers benefit from being able to manage everything in one place, reducing time on administration and allowing for more time to be spent with clients. Furthermore, the platform technology itself allows advisers to take advantage of an advanced reporting system.
Platforms are also beneficial for investment managers like Fundamental Asset. The ability to manage client portfolios in one place and to remove custody risk from our own business model is a key advantage. As such, we are committed to the IFA and platform markets and work closely with our platform partners, including ABRDN Elevate & Wrap (formerly Standard Life Elevate & Wrap), Nucleus, Transact, Ascentric and Funds Network.
