Planning a full retirement
Ben has only just retired, and he and his wife Rachel are looking forward to spending more time on their boat and at their converted farmhouse in France.
The traditional view is that retired people have a cautious investment outlook, but Ben could easily live for another 20 years or more. As a result, he feels he should take a long-term investment view, with a focus on growth potential. Inheritance tax is not an immediate concern, but life doesn’t always go according to plan, so he knows he should take steps to make sure that if anything happens to Rachel and him, their children won’t face a large tax bill.
As Ben is comfortable about the risks of investing in smaller companies, a fund manager could build a portfolio of BPR-qualifying AIM shares for him. Unlike a trust, this investment won’t tie his investments up, so he will be able to withdraw money as and when he and Rachel need it – for anything from a round-the-world holidayto a medical bill. As long as they live for two years after setting up the portfolio, any AIM shares they still own when they die will be exempt from inheritance tax.
Becoming frail
Jennifer is a widow in her 80s and has started to become frail over the past few years. Though her family have no immediate worries about her health, they would probably not expect her to live for another seven years. That means gifts and trusts are not a realistic option now that she has finally turned her mind to estate planning.
On the other hand, investing her money in companies that qualify for BPR would give JenniferIHT-exemption in just two years. A fund manager will be able to invest her money for her, choosing unquoted trading companies that have qualified for BPR in the past.
Jennifer is comfortable with the risks of investing in unquoted companies. Her adviser recommends a BPR solution that targets capital preservation with a modest return, while still allowing withdrawals if required.
Planning for ISAs
After investing in PEPs and ISAs for almost 20 years, Thomas has built up a tax-efficient portfolio worth in the region of £150,000. With his other investments he has been careful to mitigate the possible effects of inheritance tax, but the ISA investments have been more problematic. Should he keep them in the ISA wrapper, where they give him tax-free income and growth – in which case his children will have to pay inheritance tax on them? Or should he move the investments out of the ISA wrapper, surrendering the valuable tax benefits, and make them part of his broader estate planning?
Since August 2013 there has been an option with the potential to solve this dilemma for Thomas – an ISA investing in AIM stocks that benefit from the IHT exemption provided by BPR. A fund manager with the expertise to know which AIM-listed companies should qualify for BPR will be able to build a specialist ISA portfolio for him. Bearing in mind the risks generally associated with smaller companies, Thomas may decide to transfer just a portion of his ISA portfolio. But any ISA investments that he decides to transfer into qualifying AIM shares will not create an inheritance tax liability for his children, as long as he keeps them for two years and still has them at the time of his death.
This article is issued by Octopus Investments, which is authorised and regulated by the Financial Conduct Authority. Case studies above are for illustrative purposes. As with all investments capital is at risk. Tax rules depend on the individual and could change. Unquoted companies, and those listed on AIM, can be riskier and more illiquid than companies listed on the FTSE 100.
