Reducing the level of inheritance tax paid on death is often a question of effectiveness versus control.
The most effective solutions for inheritance tax mitigation typically involve giving up control over assets; losing access to your money when you might need it most.
Placing assets in trust can be a good way to remove them from your taxable estate, assuming you have no need to access the capital in the future.
Trust solutions which allow some or complete access to capital in the future are generally less effective for tax planning purposes.
Whilst gifts and trusts are the most common estate planning tools used by Financial Planners, another option to consider is the use of Business Property Relief through an investment in a portfolio of AIM shares.
Often marketed by stockbrokers as ‘inheritance tax portfolios’, these involve investment in a portfolio of companies listed on the Alternative Investment Market (AIM).
Money invested in these schemes escapes the clutches of inheritance tax after a two year period, rather than the seven year Potentially Exempt Transfer (PET) period associated with other gifts to reduce inheritance tax.
Whilst listed on AIM, the companies selected in these inheritance tax portfolios are treated as ‘unquoted companies’ for the purposes of Business Property Relief. This allows the original investment and any investment growth to fall outside the value of a taxable estate after two years.
There are naturally risks involved with this planning strategy.
Companies listed on AIM are smaller and tend to be less well capitalised, which increases their risk profile from an investment perspective. This risk can be managed to a certain extent through diversification and careful selection, but the value of this type of portfolio can certainly fall as well as rise.
Any future change to the tax rules is another potential risk when using this sort of tax planning scheme, despite it being well established for many years.
Investors considering the use of an AIM portfolio to reduce inheritance tax should do so carefully once other basic IHT planning measures have been considered and implemented where suitable.
Care should be taken to select a suitable AIM portfolio, with the construction of a bespoke portfolio to suit individual investor requirements for risk, growth potential and income often more suitable than picking an inheritance tax portfolio off the shelf.
Photo credit: Flickr/Samuel M. Livingston
