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Last year, a client came to see me to review his investments and seeking advice on his financial position. He had held investments for many years in a variety of products, which ranged from normal bank accounts and National Savings investments, to investment bonds and stocks and shares.
His investments and property had all increased in value and as a result he was in a comfortable position which continued to support him during his retirement. His income was more than sufficient to meet his outgoings, so overall he had no real financial concerns.
In the past the client had performed some Inheritance Tax (IHT) planning, but during the review and taking account of the most recent growth on his assets, I identified that around £250,000 of his estate would still be subject to IHT on his death. IHT is charged at 40%, which means that his daughter, the sole beneficiary of his estate, could potentially lose £100,000 of her inheritance and have to pay it to the taxman.
Like many clients, he wanted to preserve as much of his estate for his daughter as possible, so we agreed to look at what options were available. As is often the case, he wanted to retain full control and ownership of his assets and wanted full access to his funds whilst he was still alive, as opposed to making significant gifts.
We agreed a suitable level of cash reserves which could be accessed in an emergency and reviewed his key objectives, needs and investment risk outlook. My recommendation for this specific client was to restructure his existing ISA portfolio and transfer it to an ‘AIM ISA.’
An AIM ISA is a relatively new concept and is designed to combine the tax efficient advantages of an ISA, whilst also benefitting from IHT relief after two years, unlike a standard ISA investment which does not benefit from any form of IHT relief.
IHT relief is available because it invests in shares of smaller companies which are quoted on the Alternative Investment Market (AIM) which also qualify for Business Property Relief as long as the shares are held for a minimum of two years and are held on death of the investor.
The AIM market was launched over 20 years ago as the London Stock Exchange’s secondary market and helps provides smaller, growing companies with access to capital. Since it was established, companies have raised over £100 billion of initial and ongoing funding and it is reported that in 2013 they contributed approximately £15 billion to the UK’s GDP*. There are almost 1000 companies listed on now which means ISA providers can offer investors a wide range of potential investment opportunities.
AIM investments are not suitable for every investor though. They invest in smaller, less established companies and as a result, they carry considerably more risk of capital loss and are much more volatile compared to other investments. Conversely, these companies offer other growth opportunities that more mature companies may not be able to provide.
This year, I conducted his annual review and he was delighted to see that his initial investment had grown by over 30% and as with all ISAs all growth is tax free, and as long as it remains untouched for at least two years the value will fall outside of IHT calculations. In this scenario, the aim is to have sufficient growth from the AIM portfolio to offset the potential IHT charge which will fall due on the estate. For this client, he’s well on the way to preserving the full value of his estate for his daughter, making for a pleasing review.
If you have inheritance tax concerns and would like to organise a financial review of your affairs, please contact me or one of my colleagues. We have independent financial advisers based across our office locations across the North or England and South Scotland and all our initial meetings are provided with our compliments.
It is important to be aware that AIM investments are high risk and are not suitable for everyone. This article does not constitute or infer a recommendation and professional advice is strongly recommended before considering such an investment. Capital is at risk and as with any investment, it should be invested for the long term.
IHT reliefs are not guaranteed and could be withdrawn at any time. Past performance is not a reliable indicator of future results and the example above should not be relied upon. Due to the nature of the investment, it may be difficult to sell in the future and may attract additional dealing costs.
* Source: the London Stock Exchange.
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