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HOLDING ON TO THE FAMILY'S WEALTH FOR THE NEXT GENERATION.

View profile for Edward Papworth
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Over the last few years families have found that with the increase in the value of property and other assets they may potentially be facing an inheritance tax liability upon the passing of parents and other near family members. The nil rate band for inheritance tax has been £325,000 since 2010/11. The introduction of the Residential Nil Rate band in 2017 has helped and has now increased to £175,000 per person. Like the Nil rate band if this is unused it can be passed on to a surviving spouse or civil partner. This however may not be totally straightforward as the Residential nil rate allowance reduces once the value of the estate passes £2 million. You can also only pass on the value of the equity in the property so this may be less than the figure above.

This leaves the question on how to pass on wealth to the next generation without incurring a potential inheritance tax liability. One of the options is to gift the funds whilst you are still alive and hope that you survive the requisite 7 years before it is exempt from inheritance tax. However this may be difficult if you are about to go into care and the local authority feel you are giving you money away so they will be liable for your care costs. There may also be the thought that you do not want to pass it to the next generation yet in case you want to use the funds yourself for your own care and living expenses.

This has led to investors looking at the Alternative Investment Market (AIM) in order for them to get Business Property Relief on the investment. Under the current regulations these investments must be held for at least two years and provided the investment is held until the investor passes away these funds will be exempt from Inheritance tax. The funds in these investments are generally invested into smaller UK companies. These companies are not all new start-up businesses as some have been around for over 100 years. The funds are also invested into a number of different sectors. The managers of these funds monitor them to ensure Business Property Relief is still applicable and from time to time these Companies may be, for instance, taken over and business property relief is lost. One of the main problems however with this type of investment is that the volatility in the investment can be large and this was shown in the resent lockdown when some AIM investments had some of the largest falls. Their higher risk may be a concern to some investors, however some may see this as a risk worth taking as they know that otherwise their families would be faced with a 40% inheritance liability if they did nothing.

The AIM offering has also changed over recent years with some providers setting up their own companies which specialise in one or two particular areas. For instance one provider has set up a company which specialises in renewable energy such as wind and solar farms. This has given a greater level of stability in values but generally a lower return when held over a number of years. This may be preferable to lower risk investors. Some providers may also offer life cover for the first two years for the amount that the family would lose in inheritance tax if the investors did not survive the requisite 2 year period. This would therefore be for 40% of the value of the invested funds. There is however an age cap for this and varies for different providers.

This therefore gives the investor a number of options. It allows them to retain the investment in their name rather than gift the funds to the family or place them in a trust from the start. They can look at both high and lower risk investments. For the funds to get inheritance tax relief they only need to be held for two years and remain invested until their passing. This may be of benefit for those who feel they may survive for two years, but are unsure if they will live for the 7 years required for a gift to be inheritance tax free.

Of course no one knows how investments will perform in the coming years and past performance is not a reliable indicator of future returns. Having a trusted financial adviser however to navigate the various tax products and the magnitude of financial funds available can have a very positive affect on your overall long term objectives.

If you would like to know more or would like to arrange for someone to contact you regarding your financial planning please contact our local Chattertons Office.

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