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Demand rises for inheritance tax shelter investments

Demand rises for inheritance tax shelter investments
Published by
The Financial Times

3m read

19 May 8.06am

Hargreaves Lansdown is not responsible for this article's content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest. Article originally published by The Financial Times.

Inheritance tax shelters are no longer being exclusively marketed to very wealthy investors, according to new research.

Financial planners have begun to sell tax-efficient investments to people whose estates would otherwise pay as little as £15,000 of inheritance tax (IHT), a report said.

The analysis by Intelligent Partnership, which provides research for financial planners, focused on investments designed to make use of business property relief (BPR), a concession introduced in 1976 to allow family-owned companies to be transferred free of IHT.

Tax planners are promoting schemes involving BPR because they only require their clients to survive for two years to bequeath them free of inheritance tax, rather than the seven years needed for gifts.

There are 52 tax-efficient products using BPR that are open to new investors, of which four have been launched since June 2016. About half of these invest in shares listed on the Alternative Investment Market (Aim), which has become an increasingly popular way of accessing BPR relief since a 2013 Treasury decision to allow their inclusion in individual savings accounts (Isas).

Efforts to make IHT planning attractive to Isa investors helped push the average minimum subscription for new BPR investments down to £13,810, which was less than a third of the historical average of nearly £50,000 for those launched before June 2016.

Intelligent Partnership said: "We believe this change is particularly relevant to people who are subject to a potential IHT bill in the range of £15,000 and £40,000. Clients in this group may previously have found BPR solutions unfeasible due to their minimum subscriptions, usually £50,000 or more, but now they are able to meet the lower limits and invest an amount which just offsets their potential IHT liability."

Aim is a market for growth companies, so investment returns can be volatile. The survey of advisers highlighted investment risk, lack of liquidity and the risk of difficulties when it came to selling BPR investments as the top concerns of financial advisers. The proportion of advisers who never recommended BPR increased to 17 per cent this year from 11 per cent a year earlier, although Intelligent Partnership said the increase might be due to the expansion of its survey sample.

The report also highlighted long-running concerns over a potential price bubble in the Aim market, and to what extent the valuations of BPR-eligible companies were being driven by tax advantages.

Stating it was "logical that such concerns exist" the report added that some managers argued that share price movements did not support this view.

Not all Aim shares qualify for BPR - for example, those dealing in land, property or investments - and shares must be held for at least two years to qualify for relief. Intelligent Partnership estimated that between 500 and 750 Aim listed companies would qualify for BPR.

Other types of BPR investments include "enterprise investment scheme" investments, which have additional tax benefits, as well as other types of private company shares. Intelligent Partnership found that while most advisers were open to both Aim-listed and private company BPR investments, there was a growing preference for private companies.

Inheritance tax is paid after fewer than one in 25 deaths. According to the HM Revenue & Customs statistics, the government collected a record £4.7bn of IHT in the 2015-16 tax year. A new allowance is being introduced that applies to homes that are left to direct descendants. It will result in an additional £100,000 of nil-rate band - the term for the tax-free allowance - in 2017-18, rising to an additional £175,000 in 2020-21.

Copyright The Financial Times Ltd. All rights reserved. Please do not cut and paste FT articles and redistribute by email or post to the web. This article was written by Vanessa Houlder from The Financial Times and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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  • 19 May 8.06am
  • 3m read

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Article originally published by The Financial Times. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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