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Relief road to IHT avoidance

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Rachael Adams on how business property relief is handing investors back control of their assets in avoiding IHT

Avoiding IHT can be a complex and time-consuming process. The most common approach to IHT mitigation is by setting up a trust or by gifting cash away as a potentially exempt transfer.

However, for those who do not wish to wait seven years to become IHT-free and be able to retain direct control over their assets, there are several investments that qualify for business property relief and receive IHT exemption after being held for two years are an attractive proposition.

BPR applies to a limited number of assets, the most common being commercial forests and farmland, unquo-ted shares, shares listed on Aim and some EISbacked businesses.

For investors in farmland or forestry, IHT exemptions only apply to those who demonstrate they are actively managing woodland for forestry and those who either farm the land daily themselves or have spouses that do. This makes it difficult for “gentlemen farmers” who merely live in country houses or own the land without managing it them-selves to take advantage.

Stellar Asset Management chief executive Jonathan Gain says: “There are checks in place to confirm the owners are farmers, such as subsidy receipts.”

Octopus Investments man-aging director Paul Latham agrees that few country house owners are able to slip through the net, saying: “IHT avoidance is an area that HMRC is very hot on. There are so many other regulations around farming that any real farming business will have plenty of documentation to justify its status.”

That and the high cost of investing directly in woodland and farmland - the cost of buying a comm-ercially viable piece of woodland starts at around £250,000 - means that they are not likely to see increased investment for IHT purposes.

As an alternative, there are several timber and forestry unit trusts available that eliminate both the high entry costs and the demand of day-to-day management by the investor.

The Phaunos timber investment trust run by Four Winds Capital Management is one option. Another option is the First Stellar forestry fund run by Stellar Asset Management with minimum investment starting at £15,000.

Kleinwort Benson private tax client specialist Graeme Stenson believes that Aim investing will become more popular.

He says: “For most individuals, farming will not be practical. Aim has relatively easy access and private wealth in the UK is continuing to grow at the top end.”

For Aim shares to qualify for BPR, they have to be owned for at least two years but there is no upper limit on the amount invested. The other main advantage of Aim investments, and for forestry investments through a pooled investment, is that unlike placing assets into trust, the investor still has direct control over the assets and so can release the value in them at any time that the need arises.

The big disadvantage is, of course, that Aim shares can be more volatile than equities on the FTSE all share indices and they can also be less liquid than more mainstream investments.

For this reason, Latham says he is seeing more interest in collective schemes invested in unquoted shares than in Aim-listed shares.

He says: “Based on the discussions we have with advisers, structured unquoted company investment is the most popular solution.

“The average person investing for BPR is likely to be elderly and therefore to be risk-averse. We sell 10 times more of our lower-risk product than we do of Aim-based portfolios.”

Stenson says: ” “Although Aim has proved to be not for ’widows and orphans’ because it still has some risk attached, it will attract more investors because you can afford for its value to deplete by 40 per cent before it becomes unprofitable.”

Whatever the asset class, there is a growing appetite for BPR as a way to offset IHT.

Gain says: “The thought of IHT mitigation after annual gifts, trusts now being caught by the disclosure regime and the freezing of the nil-rate band all point to more people investing to reduce IHT.”

Latham similarly sees BPR as “light years” ahead of the seven-year solutions of gifting and trusts. He says: “The investor retains control, can access the capital and avoids complex trust structures. The two-year solution is definitely better.”

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