Alternative Investment  

Using IHT mitigation strategies

This article is part of
Guide to IHT planning after the pandemic

Using IHT mitigation strategies

The recent market volatility brings back into sharp focus the need for financial solutions to deliver the outcomes desired by clients.

If we think about estate planning, many clients are in older age groups and their ability to replace lost funds is limited, so they are far more vulnerable to volatility. 

Equally the outcome most are looking for is to leave the best possible legacy for their families, while meeting their own life needs. 

But given that the world is in a recession, and liquidity may be tighter, this could reduce the attractiveness of alternative investment market (AIM) shares for Inheritance Tax (IHT) planning, despite the tax advantages remaining in place.

Simon Harryman, investment director at Ingenious says: “The key to this is the delivery of consistently good returns above inflation, not chasing the highest possible growth as the volatility associated is often too damaging.

“Aim is the perfect example of this.

"Since its inception in 1996 the average annual return from the FTSE AIM All share index has been 6 per cent per annum.

"The problem is that this has not been delivered steadily; ranging from -57 per cent to +160 per cent in discrete years.

“£100,000 invested at the end of Q1 1996 would have been worth just £68,996 at the end of Q1 in 2020.

"That’s a reduction of over £30,000 in 25 years, in real terms this would be much worse. Contrast that with an investment which delivers 6 per cent consistently over the same period and £100,000 becomes £404,983.

“Unlisted Business Relief qualifying investments, which are not subject to market sentiment have delivered with much more consistency and lower volatility.”

Shares on AIM can offer an individual the opportunity to pass on wealth without incurring IHT.

"In principle, an investor buys AIM shares which qualify for business property relief (BPR), survives for more than two years, and then passes them on to their children through a will. 

The risks with AIM portfolios

Ian Cook, financial planner at Quilter Private Client Advisers believes that a recession coupled with tighter liquidity could reduce the  attractiveness of AIM or business property relief portfolios.

Mr Cook explains this is because this type of planning can be unsuitable for clients unaware or unwilling to accept the risk and volatility, and should only form a portion of the financial plan, mainly for capital not required in lifetime, that can be called upon if needed. 

“I feel I would be leaving a client severely exposed if the use of an AIM portfolio was their only means of accessing capital,” Mr Cook adds. 

“The tax advantages and ability for the client to call on their capital are attractive features of this type of portfolio, however I am always mindful that what you may save in tax for your estate, you could potentially lose when markets are as volatile.