Plain “Vanilla” Inheritance Tax Planning

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

So, what inheritance tax saving schemes will be withdrawn when the Office of Tax Simplification (OTS) delivers its report in the autumn of 2018? Presently, the OTS is seeking views from interested parties via an online survey to understand people’s perception of inheritance tax, taking into account the ease or complexity of legislative rules/process. One consequence of the survey and subsequent report could be that individuals face losing tax relief currently available when investing through smaller companies.

Business Property Relief (BPR), which was introduced by the 1976 Finance Act, was intended to prevent individuals inheriting a family run business then having to sell the company to pay an inheritance tax bill. This relief was extended to investing in Alternative Investment Market (AIM) listed companies in the mid-1990s. From 2013, it has been possible to hold AIM shares within an Individual Savings Account (ISA) portfolio. If the ISA investment is held for 2 years plus and is still held on death then the portfolio will qualify for BPR. Therefore, investors in AIM ISAs can enjoy tax-free growth whilst alive and then pass on this investment free of inheritance tax on death (a potential saving of 40% tax). This perfectly legitimate use of your ISA allowance appears to me to be a big leap from the initial purpose of the legislation introduced 40 years ago.

When tax breaks start to be used on a large scale, they contradict their original purpose. HMRC will often look to close off the loophole.

In my view “plain vanilla” financial planning often provides a better long-term outcome. Fund your pension to the maximum; we would usually expect any remaining pension fund to be outside of your estate on death. ISA allowances on death can be shared between husband and wife. Plus using more traditional approaches to estate planning such as the annual allowances, gifting out of income and lending money are far less likely to be challenged by HMRC.

In addition, worthy of note is that AIM investments can affect the “Main Residence Annual Allowance”, an allowance that can be used when passing your home to direct descendants.

If you would like assistance with your financial planning, please do not hesitate to drop me a line.

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