What other ways can advisers help mitigate IHT?

According to Robert Clough, investment manager for Thesis Asset Management, the most effective way of reducing the IHT bill is to spend the money.

“Many people worked hard to build up their estates and consequently want to enjoy their retirement – be this flying business class, travelling the world or simply just drinking well,” he notes.

However, if clients do want to leave something for their loved ones, there are other ways to help mitigate IHT.

Pension planning

Good retirement planning can help minimise IHT on any pots that can be passed onto a named beneficiary.

Will Hale, chief executive of Key, says: “For example, if clients choose not to touch a small pension pot and leave this to your beneficiary, they may only pay income tax rather than IHT on it and, depending on which band they are in, this may be lower than the 40 per cent IHT charge.”

While there are opportunities for considerable growth, Aim investing is higher risk, so it is important to be aware of potential losses before investing.Alison Beech

Martin Pickles, technical adviser for the SimplyBiz Group, believes the most IHT effective arrangement is a pension written under a discretionary trust.

This is because it puts the fund outside of the scheme member’s IHT-able estate, while giving them full access to the money, with no gift-with-reservation issues. “Add into this scenario the fact the investment fund is growing tax-free”, he comments.

Downsizing and equity release

Downsizing into a smaller home that is well below the £325,000 threshold is one way to help reduce the value of the property asset.

Equity release might also help when it comes to the family home, according to Mr Hale.

He explains: “It may also pay to use equity release to reduce the value of your property to bring it within the IHT threshold.”

Charity starts at home

Charitable giving is often a contentious area, especially if surviving relatives want to contest a significant donation made after death to a cats’ home, but it is also worth discussing with clients.

This is because if anything above the £325,000 threshold is left to a recognised charitable organisation, there will be no IHT charge.

Moreover, if you leave at least 10 per cent of your estate to charity, it will reduce how much IHT is paid on the rest, so the rate at which IHT is calculated will be 36 per cent.

Regardless of whether the bequest is to a charity or to another dependent, Alison Beech, partner at Percy Hughes & Roberts Solicitors, strongly recommends safeguarding the bequest through a trust, especially if the money is being left to a child, or to someone who has a disability or is in mental ill-health.

Aim stocks

Under current tax rules, private investors can benefit from unlimited exemption to IHT if they hold shares in a qualifying Alternative Investment Market (Aim) company for at least two years. This is because shares classed as business assets are exempt from IHT rules and therefore qualify for business relief (BR).

Shares qualifying for BR are also eligible for inclusion within Isas, so can be sheltered from income and capital gains tax.

The rate of relief from IHT on the transfer of relevant business assets is at a rate of 50 per cent or 100 per cent.

Scott Lothian, head of direct equities at Brooks Macdonald, explains: “Investment into Aim-listed companies can offer a compelling mix of tax efficiency and long-term capital growth potential, although tax treatment depends on the circumstances of the individual and may be subject to change.

“Certain Aim shares are treated as ‘unquoted’ for tax purposes and, as such, can potentially qualify for BR after two years of ownership. This allows the assets to fall outside the holder’s estate but does not give up control of the capital.”

He says clients already taking significant equity risk via conventional FTSE 100 holdings are increasingly shifting a portion of their wealth into IHT efficient AIM-listed shares – often within their Isas – to derive further tax benefits.

However, as Ms Beech explains: “While there are opportunities for considerable growth, Aim investing is higher risk, so it is important to be aware of potential losses before investing.”

Mr Lothian agrees, but adds: “Aim investing is clearly not suitable for everyone, but for individuals with a significant IHT liability, it can provide a compelling investment proposition, especially as part of a broader and diversified financial planning strategy.”

According to Mr Clough, certain assets like farmland and woodland qualify for agricultural relief.

“Here, if you own the asset for more than two years, then the asset is taxed at 0 per cent," he says. "This allows you to retain control and ownership of the asset, but it can be expensive and illiquid.”

Life insurance

Clients can cover IHT liability by taking out life insurance for the potential bill and placing the policy in a trust to ensure it is paid outside of the estate.

Mr Jones comments: “One of the simplest solutions is the use of a suitable life policy to provide the beneficiaries with the ability to pay the IHT liability.”

This solution can be cost-effective and useful for estates which are asset rich and cash poor, so can use the exemption for surplus income.

However, this also relies on the client being honest about disclosure of any serious conditions; failure to do so might see the insurer refuse to pay in full or at all.

Ultimately, how clients mitigate IHT depends on their circumstances and wishes, but without better understanding of all the various tax rules, legal issues relating to the estate or help in valuing their assets, it is hard to do this alone.

Hence, all respondents to this guide agree IHT is best tackled by quality financial advice.

simoney.kyriakou@ft.com

Simoney Kyriakou is currently on maternity leave