Rising Property Values Makes IHT Mitigation a Necessity

To the widespread relief of many families throughout the UK, Chancellor George Osborne used his Emergency Budget in 2015 to announce that the tax free threshold for Inheritance Tax (IHT) for couples would rise from £650,000 to £1m by 2020. The shift reflected the fact that rising house prices had inflated the gross value of many family estates to the point where they could be liable for IHT at 40%, thus dramatically reducing the value of assets being passed on to the next generation. Originally designed as a tax to hit the rich, IHT was never intended to penalise ordinary working families.

 

However, as welcome as the Government’s decision was, it might still mean a substantial tax bill for some families. An estate valued at £1.5m in 2020 would generate a £200k IHT liability, a £2m estate a £400k liability, and so on. The liability is even greater in the intervening years as the increase is tapered.

 

Therefore, it is hardly surprising that many ordinary working families, as well as the genuinely wealthy, are looking for legitimate ways to mitigate their exposure to IHT. Traditional routes include gifts and trusts, but it is well known that these involve loss of control of the assets by the donor, which can cause concern, and also require the donor to live for seven years after the transfer has been made.

 

However, there are alternatives.

 

One strategy is to commit capital to asset classes that qualify for Business Relief (formerly Business Property Relief). These include AiM portfolios, property and renewable energy as well as a few more esoteric options. This enables couples to keep full control of their capital whilst creating the opportunity for income and capital gains. 100 per cent relief from IHT can be achieved after two years.

 

An extension of this approach is to establish a discretionary managed portfolio within a limited company. Couples with more than one beneficiaries can establish a separate company for each of their children, with investment strategies for each designed to match individual circumstances. These companies, in turn, invest in a portfolio of Business Relief-qualifying trading activities selected to offset risk through diversification. Similarly, couples can secure 100 per cent relief from IHT after only two years.

 

As we covered in our recent guide, an AiM Portfolio can be incorporated into an ISA providing additional shelter (within certain limits) against Income Tax, Capital Gains Tax as well IHT. As a result, an AiM ISA can be one of the most tax efficient products available on the market today.
For the investor with an appetite for greater risk, there are EIS and SEIS investment. Not only do they allow investors to mitigate IHT, but they also provide 30% income tax relief and the opportunity to defer any capital gain. The trade off is, of course, the risk. These are investments in much smaller, early stage businesses that could prove to be unsuccessful in the future. They are, therefore, the preserve of the sophisticated investor and a portfolio approach should always be taken.

 

Finding innovative, modern solutions is precisely what we do in conjunction with our professional advisers. Although tax legislation can change, we only use longstanding robust legislation to base our services on to drastically reduces any potential legislative risk. Full details of our suite of IHT mitigation services can be accessed via our website. Alternatively, our experts are on hand to offer advice on: 020 3195 3500.

 

To download this blog on IHT mitigation, please click here.

 

If you would like any further information about this blog or any other topics of interest, please call us on 020 3326 0682 or you can email matthew.steiner@stellar-am.com.

 

 

Marketing Manager


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