Tag: Inheritance Tax

Smart thinking AIMed to reduce your inheritance task exposure

An IHT opportunity you may not know about

As the game of cat and mouse continues with the government and taxpayers, the scope of tax planning opportunities that are legitimately open for high earners has been steadily reducing in number and variety.

The latest industry figures show that taxpayers paid £5.3bn in inheritance tax in the last year to February 2018. That’s a rise from the £4.7bn paid in 2016/17. UHY Hacker Young, have suggested that there is a real scope to use Business Relief (BR) to further lessen Inheritance Tax (IHT) bills to HMRC. With forecasts predicting that the value of BR to have risen 8% in 2017/18, from £655m in 2016/17.

Investing in the Alternative Investment Market (AIM), with an Inheritance Tax (IHT) Plan,enables qualifying taxpayers to reduce IHT bills, through investments made in unlisted companies and other business assets.Not only that, but both investors and the government seem to like what’s on offer; as it can produce healthy savings and returns, as well as contributing to the wider economy and create jobs and growth.

An alternative to a Trust that’s worth considering

When you invest in the AIM market, most companies are eligible for Business Relief (BR); and, if held for at least two years, the shares are classed as business assets, so are completely free from IHT.

An AIM Portfolio IHT Plan can also provide you with greater flexibility than a trust and can also be less expensive and time-consuming to set up.

Unlike a Trust, you don’t have to wait for seven years in order for your assets to escape the remit of IHT, as your AIM IHT Plan qualifies for tax relief after just two years as opposed to seven – provided the AIM shares continue to be held thereafter.

Another benefit over a Trust, is that you no longer run the risk of losing access to your investments, as you retain control of your assets at all times. You are also free to increase contributions in the future, as well as possibly earning equity related returns on your AIMs investments.

You can even utilize an existing, or new, (ISA) 

You can either transfer an existing ISA, or set one up in your AIM IHT Plan. Which has the double advantage of the holdings in the AIM companies qualifying for BR. You’ll also be exempt from any income tax on dividends and capital gains tax on profitable disposals. 

How are savings on Inheritance Tax achieved? 

Providing you have held the shares for over two years then, under the current taxation rules, there us unlimited exemption from IHT on all shares that qualify for BR held by you when you pass away.  

Pretty much all of the companies traded on AIM, with the exception of those principally engaged in property or investment activities, qualify for BR. Which means that, under the current legislation, all of the applicable shares in your AIM portfolio will be seen to be business assets, which means that they are exempt from IHT if owned for more than two years.

As the IHT exemption is only available on the qualifying shares, held at the point of death, any AIM IHT Plan should be viewed as a medium to long-term investment, with a view to keeping it for a minimum of five years. 

Upon your death, your portfolio can be sold, or transferred to a spouse, without attracting IHT. 

Is an AIM IHT Plan right for you? 

If you’re concerned that a large portion of your wealth may not get to the people you wish to leave it to, because of the likely IHT charges to be made on your estate, then the AIM IHT Plan could be just what you are looking for.

As it provides you with an investment opportunity that could not only deliver a strong performance, but can also reduce your IHT liability. 

If you are considering investing in an AIM IHT Plan, then it’s important that you get the right kind of independent advice. As it should always be viewed as a long-term investment option that carries a slightly higher risk than other investments and my not necessarily be the best option for your immediate requirements.

The usual minimum investment you should consider with an AIM IHT Plan is £100,000. An additional contribution of a minimum of £25,000, or the full annual ISA contribution, can be made at any time after you start the plan.

A cautionary word about the Plan

Firstly, it’s important to appreciate that the current rate of IHT as well as the value of this option regarding IHT savings and the exemption afforded by an AIM IHT Plan could all change in the future.  

Having said that, BR has been around for a number of years and under various different Governments, and doesn’t appear to be drawing attention in any of the current manifestoes. 

It is important to recognise the long-term, and higher risk, aspect of the plan. As I would suggest that you especially consider the following points, in order to ascertain whether this type of investment fits your personal investment profile:

  • As most AIM shares tend to be illiquid, it might be more difficult to sell them. Also obtaining reliable information regarding their value and the risks they are exposed too can also more difficult to find.
  • Any AIM company can revert to private status. This would mean that shares may become impossible to trade and the value and protection offered by AIM would end. 
  • Like the FTSE, past performance is no guide to the future and the value of shares purchased on AIM (and income received) may go down as well as up; and you may not get back your full investment
  • Not all investments into the AIM market qualify for BR, plus the amount of tax relief available may change at any time. 

Need to know more?
As always, if you have any questions regarding your current or future financial situation, especially around AIM IHT Plans, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Stay on the right side of the law with Lasting Power of Attorney

Whilst Lasting Powers of Attorney can be the ideal way to safeguard the financial affairs of someone who has unfortunately lost the capacity to do it for themselves (the donor), it does come with some important and onerous responsibilities. 

If you are not fully aware of these, then there is a danger that you could end up with a court judgment against you. In fact, in 2018/2019 court judgements against people acting outside their permitted powers more than doubled on the previous year.

It’s a complex area of law. However following a recent ruling by the Court of Protection (COP), which was referred to them by the Office of the Public Guardian (OPG), new guidance is now available. In order to save you the job of sifting through the Court’s judgement and summary, I’ve highlighted the main points in this blog.

The majority of cases under review contained compulsory instructions given to the person with the power of attorney (an attorney) on how they should act. The court rules that the use of compulsory instructions was incompatible with the notion of having to ‘act in the best interest’ of the donor and that an attorney should not be bound by such instructions.

In terms of an attorney using the donor’s money for the benefit of others, without the need of gaining approval from the COP, the judge also made the following important comments:

How to make gifts 

The Mental Capacity Act 2005 clearlysets out what gifts an attorney is able to make. With restrictions in place to protect the donor’s assets from being ‘gifted away’.

As an attorney, you are able to make gifts on birthdays, Christmas or to charities the donor may have previously been a supporter of; with the value of that gift been seen to be reasonable and not detrimental to the donor’s future financial needs.

Obviously this hinders any estate planning that hopes to use large gifts as a mechanism for reducing the value of the estate.

It is possible to make gifts outside of these restrictions by applying to the COP. However this will add costs and delays, with no guarantee of a successful outcome.

If the donor is still capable of making the gifts themselves, then this should be supported. Although, if the donor has any intentions of making substantial gifts this is best done prior to incapacity becoming an issue.

Can an attorney provide for others?

If a payment is deemed to meet the needs of someone the donor was obliged to provide for, such as a spouse or any dependents, then this has always been viewed differently to that of a gift.

However, the recent ruling by the COP has extended this. The Judge commented upon the requirement to act in the ‘best interests’ of the donor, so felt that an attorney shouldn’t just be limited to ‘needs’, but should also take into consideration the donor’s ‘past and present wishes and feelings, beliefs and values’. Which broadly means that an attorney can do whatever he or she believes that the donor may have reasonably done themselves; but you may need to provide some evidence of this. 

Providing evidence of intention

The best evidence of intent comes from a donor’s past behaviour. Or, better still, an expression of intent included within the power of attorney document. 

When making decisions an attorney need only take evidence into account, they are not bound by it. As an attorney’s main consideration should always be the best interest of the donor and not the interest of the recipient.

Be aware that justifying an action on the basis of saving Inheritance Tax (IHT) is unlikely to be deemed to be in the donor’s best interest. There needs to be other factors and motives, although the size of the donor’s estate and associated costs of lifestyle and care can also influence decisions.

As a general rule, and to avoid misinterpretation, any money transferred to an individual that falls outside the definition of a gift under the Mental Capacity Act 2005, will be deemed to be a transfer of value for IHT, unless it’s covered by an exemption.

Scottish independence!

If you are in Scotland, then the legal position is a little different.

An attorney is able to make gifts, including those for estate planning purposes, just as long as the donor has specifically included this within their power of attorney document.

To sum things up

The ruling by the COP provides greater opportunity for an attorney to provide for the needs of family members, without being confined to only providing gifts on birthdays or Christmas. However, these provisions need to be made in conjunction with a clear expression of wishes by the donor along with a belief, by the attorney, that these actions are in the best interests of the donor.

Any uncertainty should result in an application to the COP for further clarity and permission. 

As always, if you have any questions regarding Lasting Powers of Attorney, or if you need to put an LPA in place, then please contact us at Bridgewater Financial Services, where we will be delighted to guide you through the complex process.