How much do you want to leave the taxman?

“Inheritance Tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue” Roy Jenkins, ex-Labour chancellor, famously quipped in 1986.

| 7 min read

It was a fantastic quote, which he made following the introduction of “potentially exempt transfers” which allowed Britons to make a gift of any size to their loved ones, inheritance tax free, provided they survived for seven years following the gift and the gift was made outright, with no strings attached.

However, if Mr Jenkins was alive today, he might be surprised to learn that inheritance tax receipts have risen substantially since the turn of the century. This trend looks set to continue with the current chancellor, Rishi Sunak, freezing both the nil-rate band and residence nil-rate band until April 2026 in his latest budget.

There are many exemptions that can help mitigate inheritance tax. Regrettably, many families fail to take full advantage of what is on offer. So, despite inheritance tax being regarded as the UK’s most hated tax, why is this happening?

Potential Reason 1 – People don’t realise they have an inheritance tax liability

Could you have an inheritance tax liability and not realise it? Sometimes there is a misconception that inheritance tax is something that only wealthy people need to think about; however, the reality is that many more of us now have an inheritance tax problem due to rising house and asset prices.

There are also sometimes misconceptions about how certain tax wrappers are treated by HMRC on death. For example, many people assume that ISAs can be passed on inheritance tax free because of their other tax benefits. Unless an ISA is made up of AIM shares, it could be subject to inheritance tax if your assets are above your nil rate bands. VCTs are another vehicle that some investors believe will be outside of their taxable estate when they die. Even if it is an AIM VCT, it will not be.

Potential Reason 2 – Families don’t want to talk about it

According to a TIAA study, just 11% of parents and 37% of adult children are likely to initiate a conversation about money; however, 74% of parents and 87% of adult children think discussing financial matters is important.

Many families find the prospect of discussing personal finances extremely uncomfortable. At first glance, it might seem unnecessary to discuss finances with your children or vice versa. But having these conversations early, while everyone is physically healthy, could help avoid some uncomfortable dialogue down the line. It could also be what saves your loved ones from an unwanted future tax bill.

Potential Reason 3 – Maintaining control

Roy Jenkins jested about distrusting your heirs in his quote. In some cases, people may choose not to gift assets early because of this; however, it is emotionally difficult to give up control over assets that you have spent years accumulating.

People also have their own health and future to consider. What about your own health and longevity? What if you need long-term care, in the future, which could be expensive? These questions again make people hesitate before acting.

Potential Reason 4 – Families think it’s too late

Many elderly people or powers of attorney, acting on behalf of loved ones who have lost mental capacity, believe that they have left it too late to mitigate inheritance tax.
Although it certainly pays to start planning early, as more options will be available to you, you should still consult your financial adviser as there are a number of generous reliefs and allowances which could still be available.

Business Relief

If you have any of the concerns above, then one option that your financial adviser may recommend, if it is appropriate, is business relief.

Business relief was introduced in 1976 to help facilitate the transfers of family businesses from one generation to the next and minimise the inheritance tax burden. Since then, business relief has been extended to allow minority shareholders to also benefit from investing in smaller businesses. As a result, inheritance tax solutions have been developed to allow investors to access a portfolio of business relief qualifying assets. This has led to a dramatic increase in business relief claims, with a 50% rise in claimants between the tax year 2016-2017 and 2017-2018 (HMRC’s latest published statistics).

The reason for the increase in popularity is that once business relief qualifying assets are held for a minimum of two years, they are exempt from inheritance tax providing they are still held at the time of death. If the two-year holding period is not met, a surviving spouse or civil partner can inherit the portfolio without restarting the required holding period. This provides the speed of inheritance tax mitigation which many investors are looking for.

The other problem it can solve is that it allows you to maintain access and control of the assets. Business relief is an investment in your own name – no gifting. You could choose to sell down the investment later in life, subject to being able to sell it, and regain access to the capital. In addition, you can hold off the awkward family inheritance tax conversation for a little longer (not recommended!) as the assets stay in your name and your beneficiaries will simply claim the inheritance tax relief, if the conditions have been met, upon your death.

The AIM Market

The Alternative Investment Market (AIM) is a junior market of the London Stock Exchange that contains many shares which qualify for business relief. It is therefore a potential option when considering your inheritance tax planning. Investing in AIM shares is also the only way to remove your ISA from your taxable estate without breaking open the tax wrapper.

Historically, AIM has been regarded as a market full of high risk, loss-making technology and resource companies. However, over the course of the past decade, the market has matured significantly and there are now 25 companies valued at over £1bn, most of which qualify for business relief. For example, you could hold a company such as Fever-Tree, which currently has a value of around £3bn, and after two years, your beneficiaries could benefit from 100 percent inheritance tax relief on the value of the holding at the time of your death.

Over the past 10 years, many AIM services have performed very well; however, you should always be aware that your capital is at risk and that you may not get back the full amount that you invest.

There are a wide variety of options to consider when inheritance tax planning and we would strongly recommend that you contact your adviser to discuss your circumstances.

Don’t leave it for the taxman!

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

How much do you want to leave the taxman?

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