REDUCING INHERITANCE TAX THROUGH AIM

There are a number of estate planning measures that can be taken to mitigate the effects of inheritance tax on your estate and the general rule is that the earlier you start such planning the better. A number of these measures rely on making gifts (possibly into trust) to beneficiaries at least seven years before your death.

There is one estate planning measure that has really only been used by the super wealthy but which is now accessible to a much wider range of people. This coincides with the fact that inheritance tax is also now an issue that has to be faced by a very much larger proportion of the population mainly as a result of property values far outstripping the “nil rate band” for inheritance tax (£285,000 in 2006/07). Out of 482 towns recently surveyed by Halifax plc the average price was above £285,000 in 48 of them.

This involves investing some of your estate in the Alternative Investment Market (AIM). Any money invested in AIM listed companies falls outside of your estate for inheritance tax purposes after just two years. Furthermore, unlike many other solutions to inheritance tax, you retain access to your money at all times.

Such an investment is very high risk and that fact alone will mean that it should not be considered by the majority of people seeking to reduce the impact of inheritance tax for their beneficiaries. On the other hand, if you do nothing, 40% of your estate in excess of the nil rate band is certain to be paid to the Revenue rather than your chosen beneficiaries.

It would be difficult to invest directly into AIM stocks with a view to obtaining exemption from inheritance tax because the rules as to which stocks qualify for business property relief are complex. The solution is to use one of the professional management services that is available. Companies such as Brewin Dolphin, Close Brothers, Octopus, Rathbones and Williams de Broë (formerly Christows) run actively managed AIM portfolios.

We believe that a new service, the Octopus Protected ITS, will be of particular interest to people concerned about Inheritance Tax. This service allows you to take all of the upside on the AIM portfolio, however, if the portfolio falls in value, the original investment (less the initial charges) is the minimum amount that is payable on your death. The protection is provided by a life assurance policy issued on a group basis to all of the investors in the scheme. In other words if the original net investment had fallen in value by, say, £30,000, then the group life policy would pay out £30,000 to your beneficiaries in addition to the value of the portfolio of AIM stocks. The life assurance is written in trust so that the payment to your beneficiaries is free of inheritance tax. This benefit is paid for by the dividend income on the portfolio. Octopus estimates the dividend income to be 1.5% to 2.0% a year and this is not paid to you in exchange for the protection of your capital. There is no maximum age of entry to this scheme and you can invest between £30,000 and £250,000.

You may wish to have a look at a new section of our website entitled Using AIM Stocks in Inheritance Tax Planning. This also contains further details of the Octopus Protected ITS including a downloadable brochure.

Investment Advice

If you would like to discuss how an investment into a portfolio of AIM listed stocks could be used in your estate planning, or to discuss inheritance tax planning generally, please ask your usual Arch adviser or contact us on 0845 3700 661 or enquiries@arch-fp.co.uk.

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