“I’ve got all the money I’ll ever need – if I die by four o’clock,” the comedian Henry Youngman once quipped, encapsulating the challenge facing most of us – the challenge of knowing how long we have to provide for ourselves.
The consequences of not saving enough are dire. But the alternative of having too much and then surrendering a significant proportion of a legacy to loved ones is also pretty unpalatable.
With inheritance tax (IHT) thresholds frozen for 10 years, this is increasingly becoming one of the main challenges clients present to their financial adviser.
Too many of the strategies to mitigate IHT involve surrendering control of assets they might one day need. Too many involve establishing complex and expensive legal trust arrangements or engaging in dodgy wheezes dreamed up by clever accountants that may later be challenged by the Inland Revenue.
There is an alternative solution that allows a client to retain control of, and access to, their assets. It does not involve trusts and it utilises a mainstream tax relief that has the support of HMRC. It is Business Relief (previously known as Business Property Relief).
If you own (and have owned for two years or more) a business or interest in a business, shares in an unquoted company or a company traded on the Alternative Investment Market, these may be eligible for 100 per cent Business Relief. That means they can be passed on free of IHT.
The simplest way for most people to take advantage of this relief is through ownership of AIM shares. There are some qualifications to the criteria – for instance, businesses that mainly deal with securities, property or making and holding investments are ineligible. So are not-for-profit organisations.
It is important if you are using an AIM IHT strategy that you are cognisant of the rules. The AIM market also has a reputation for being volatile.
There are over 1,000 companies on the AIM market and although many are small and high risk, there are now also plenty of mature, larger companies to select from – like ASOS, Majestic Wine, Youngs Brewery and the Mulberry Group.
Some portfolio managers can mitigate the risk further by offering insurance to mitigate the IHT consequences of a person dying before the two-year qualification period is fulfilled, as well as insurance against assets falling in value. Recent changes in the law allowing AIM assets to be held within an Isa offer additional benefits. By transferring equity Isas into an AIM IHT Isa portfolio you can protect assets from income tax, CGT and IHT.
Business Relief also applies to Enterprise Investment Schemes (EISs). These arguably offer the most generous tax benefits available. In addition to the Business Relief benefits, investors enjoy 30 per cent income tax relief on investments of up to £1m per tax year. Once held for three years they are exempt from CGT on disposal and losses can be offset (less any Income Tax relief given) against general income for the year – or any income of the previous year. Loss relief can also be offset against any capital gains. There are a large number of EIS schemes available, offering investments in wind farms, technology and companies in a host of other sectors.