Simon Blowey, Financial Planner – Brewin Dolphin
It’s quite typical to begin a financial article with the well-worn quotation attributed to Benjamin Franklin that nothing in life is certain apart from death and taxes. However, as well as being a little trite and over-used, the sentiment is actually incorrect, despite its continued use by financial panjandrums. There is no greater example than inheritance tax (IHT).
In many cases, the tax saved upon the estate could fund from prep school to university, one or several educations, and as such the view of IHT is far more divisive as the levy of death duties appears iniquitous. Others support IHT to redistribute wealth or simply to raise taxes for the Exchequer, preferring the nation to receive their wealth rather than their heirs. One only needs to look at the deaths column to see how much of a taxable estate the deceased has left, with the implication that against contrary belief they had either been a pauper, or successful in effectively shielding their assets from IHT.
So for those of UK domicile wanting to take some action to redirect their wealth to people of their choosing, as opposed to adding to the government kitty, what options remain? Broadly, if you intend to see out your days in the UK, and wish to avoid higher risk ‘death bed’ planning or insuring the liability (not always a bad option), then spending it, gifting it, or holding it in exempt assets remain the main strategies.
If the taxable estate is valued over the Nil Rate Band (NRB) £325,000 (or up to £650,000 for a transferable NRB or even up to £975,000 for a widow/er and transferable NRB!), then the usual small gifts and those from surplus income should all be exempt. But the main ideas typically involve large capital gifting and exempt assets.
Here, trusts often are relevant. This could be because the beneficiary is not in a position to deal with a bequest, there are worries about creditors or divorcing children, or because the settlor (the person making the gift) wishes to receive an ongoing income and cannot afford to gift outright. Apart from Discounted Gift Trusts (whereby some of the monies gifted are potentially immediately exempt), most gifts require a period of seven years to elapse before they fall out of the estate for calculation purposes and remember too, that only the element gifted above the NRB qualifies for taper relief.
It can be easy to go awry. The incorrect perception is that trusts are expensive to establish and can be heavily taxed. However, with careful use of the trust holding investments via offshore bonds, the onerous tax rates can be neutered. An array of various off-the-shelf trusts from these bond providers can be provided and most needs catered for. Nevertheless, there cannot of course be any substitute for qualified legal advice from a solicitor.
Perhaps the greatest growth area is the use of Business Property Relief (BPR) strategies that allow relevant property, once held by the investor for two years, to fall outside of the taxable estate upon death, thus escaping the clutches of IHT. However, this property must still be owned upon death. Relevant property includes shareholdings in unquoted trading companies, partnership interests, business of a sole trader and controlling shareholdings in quoted companies. Many, but not all Alternative Investment Market (AIM) stocks (i.e. Majestic Wine) also qualify, as can Lloyd’s members’ assets used for business, and Enterprise Investment Schemes (EIS), which offer income tax relief too. These investments could carry a high degree of risk, and as such any fall in value may reduce the 40% tax saving.
The market for investors to benefit from BPR is expanding, and a multitude of schemes exist. The advantages to such investments include no trusts, no loss of control of assets, diversification, retention of income/distributions and ability to sell if needs change (i.e. for nursing home fees). The downside to these schemes is that they are deemed high-risk and sometimes illiquid, and thus are not generally recommended to comprise the main element of a portfolio. An example of a qualifying investment includes a small fund that invests in children’s nurseries, garden centres, health clubs and a country house wedding venue, whereby investors own not only the business, but in some cases also the premises from which they operate (therefore asset-backed too).
Forestry remains popular, with annualised returns of the IPD Forestry Index over the past ten years running at 10.4% pa. With no capital gains tax nor income tax, more investors are now looking to include a small dollop in their portfolio, even if past returns are no indication of future performance. Indeed ‘farm funds’ now also exist to access this asset class too, and these uncorrelated schemes can seem more popular than AIM shares, to shelter from IHT. If you have held a qualifying investment for two years, you still must pop off owning the asset.
Franklin’s quotation maybe correct about dying, but the other half is clearly more questionable — O death, where is thy (tax) sting?!
The value of investments can fall and you may get back less than you invested. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.
To find out more about developing an effective financial strategy, call Brewin Dolphin on 0845 213 3883 or visit brewin.co.uk.
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