Taking stock

An old adage affirms that there are two things a person can be certain of in life: death and taxes. Since the introduction of succession duty circa 1853, people have been expected to pay the government a proportion of their inheritance upon the death of the donor.

From its various guises over the preceding years, the current charge to inheritance tax (IHT) is levied on transfers of value from an estate to a beneficiary. It can be a very emotive subject to pay to the Inland Revenue more tax upon death after a lifetime of paying taxes to accumulate wealth within an estate.

But it's not just the ultra-wealthy who are subject to IHT. On death, anyone who leaves an estate worth over £325,000, including any gift or gifts made within seven years prior to death, can be subject to a charge. To be exact, it is the beneficiary to any inheritance who will have to pay this duty before they are legally entitled to receive their legacy, leaving many resigned to the unavoidability of paying this tax.

It is then surely a revelation that IHT need not be paid and should be considered voluntary. If appropriate measures are put in place through effective IHT planning, any potential charge can be fully mitigated, leaving the donor satisfied that their beneficiaries may enjoy their entitlement without the requirement to pay a sum to the Revenue.

Every person who is UK-domiciled is entitled to a nil rate band of £325,000 whereby a total estate value that falls within this figure will be completely free of IHT. Indeed, any unused nil rate band of a deceased spouse can be transferred to the surviving spouse to be added to the total nil rate band, which subsequently can be used on second death.

A total potential nil rate band of £650,000 may seem generous. However, the current nil rate band has been fixed until the end of the 2017-2018 tax year meaning that more people can potentially be caught, as relative estate values increase over that period. In addition, house prices have risen steadily over the last 20 years, these gains have been retained and prices are again on the increase. As a result, many people who do not consider themselves wealthy can be caught in the IHT trap.

Strategic planning

There are many strategies that, if implemented in good time, can potentially mitigate an entire IHT liability. Using trusts is a popular method but can result in expensive and complicated arrangements that may attract tax charges upon establishment, duration and at the point of final distribution of benefits from the trust. Gifting assets into a trust can also lead to the irrevocable loss of these assets when the original capital may be again required to support a person in old age.

There is a very effective but little known strategy of investing capital in company shares that are listed on the London Stock Exchange Alternative Investment Market (AIM). Qualifying AIM company shares benefit from business property relief allowance. This permits shares to be gifted to a beneficiary within a will and during a person's lifetime resulting in removing the total value of these shares from a donor's estate.

Providing death does not occur within two years of purchase, the total value of the investment into AIM shares is completely removed from any IHT calculation while enabling the donor to retain access to capital for future use. If gifted within the donor's lifetime, AIM shares must be retained by the recipient until the death of the donor.

Within the AIM index, there are a number of well-established, well-run businesses whose shares also benefit from the potential to produce returns in the form of dividends, generating an income that can be used by the donor if required. A portfolio of AIM shares is a comparatively cheap and very effective means of mitigating a liability to IHT.

If there a family is concerned that too much of an estate will be passed to the Revenue, it is worth remembering that IHT is voluntary. This is only under the provision that a sound strategy, such as investing within a portfolio of AIM shares, is implemented within good time.

Paul Parker is associate director at Canaccord Genuity Wealth Management

Past performance is no guide to future performance. There is no guarantee that the tax efficient nature of any investment will remain