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Inheritance tax;
a voluntary levy for those who do not plan ahead - Part 3

We have looked at the easy options

Over the last few weeks we have looked at the easy options to reduce inheritance tax (IHT) and the current and proposed IHT allowances.

From here, things become more complex, and you might want to take advice from a chartered financial planner to help select the right solution for you. Although choosing the right solution is a good start, for best results you also need a good long term investment strategy with regular reviews to see the job through to completion.

So what options are left?

Alternative Investment Market (AIM) shares can be held in ISAs or in a general investment account. Some AIM shares benefit from business property relief (BPR) which means that after two years of ownership they can be outside your estate. AIM shares are small companies often with dominant shareholders and can be very volatile. They are really only suitable for investors with a higher level of tolerance to investment risk.

BPR schemes are built around the Business Property Relief rules.  There are a growing number of these schemes. Often these unlisted companies are created to invest into areas where they will qualify for BPR. Typically they are involved in wind/renewable energy, bridging and short-term lending or energy management. Besides the obvious investment risk, they are also very exposed to political risk where a change in policy could make the investments or the products redundant. With what I have seen they offer very little return during your lifetime and the main sales pitch is around the 40 % IHT saved over a two year period. High tolerance to investment risk is required.



Before we move onto Trusts, I should just remind you that the new pension rules have brought Pensions into the IHT arena. Pensions don't form part of your estate, prior to taking retirement income the fund value can be nominated free of IHT. Should you die before age 75, your beneficiaries can now receive a tax free income or lump sum. Post 75, they may be taxed at their marginal rate which could be lower that the inheritance tax rate.

So to Trusts...

Like sweets there are many types, shapes and colours. However, we can sort them into three basic varieties.

  • Those that help limit the growth of your estate, Loan Trusts.
  • Gift trusts that will start to reduce your estate after three years and will be outside altogether after seven years.
  • Lastly, discounted gift trusts that will provide some immediate reduction in the size of your estate.

The advantage of a Trust is that you can personalise the investments to match your attitude to risk (ATR) so they are suitable for people with a lower investment risk tolerance. You might feel that you can't do anything about IHT because you need your capital to provide for you. Trusts have a range of features that allow return of capital, either as one-off lump sum, regular lump sums or as a monthly income.  It is very much a case of finding the right Trust for you. They have one additional feature that is often over looked. Taking an income as return of capital can reduce your income tax from 20, 40 and 45% to zero during your lifetime by deferring tax until you have passed away. At that stage tax may be due based on the beneficiaries’ tax status and how it is managed on exit from the trust investment.

Trusts typically start from around £50,000 and can be funded from cash or existing investments including ISAs, pension commencement lump sums and investment bonds.

Please note: Tax treatment depends on an investor’s individual circumstances, and it may be subject to change.

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