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Controlling interest

What options are open to IHT planners who wish to retain control of their assets?

Is there any way that I can mitigate inheritance tax and still control my assets?

According to the Inland Revenue, the majority of estates in the UK do not pay inheritance tax. Given that the threshold is 275,000 in the current tax year, how is this possible?

You are right that planning to reduce inheritance tax by giving away your assets would result in you losing control. You may consider doing this with part of your estate but it does not provide a solution where you still want control and access to your assets.

Assets which are potentially exempt from inheritance tax currently include:

  • Gifts made to individuals more than seven years before the donor’s death.
  • Anything given to a husband or wife, with a limit of 55,000 if the donor is domiciled in the UK but their spouse is domiciled elsewhere.
  • Gifts not exceeding a total of 3,000 in any tax year. This provision may be used in conjunction with other exemptions and can be carried over for one tax year.
  • Payments for the maintenance of a husband or wife, ex-husband or ex-wife, relatives who are dependent on the donor through old age or infirmity and usually any children, including adopted children and stepchildren, who are under 18 or in full-time education.
  • Wedding gifts of up to 5,000 for each child, including adopted children and stepchildren, or the person that the child is marrying, 2,500 for each grandchild, great-grandchild or the person the grandchild or great-grandchild is marrying and 1,000 to anybody elsel Gifts to UK-based charities, registered housing associations and qualifying political parties.
  • Gifts to national museums, universities, the National Trust and certain other bodies.
  • Gifts of up 250 to as many people as you wish. However, such gifts are only exempt if the total given to any one person in any tax year is not more than 250.

The Chancellor does allow some other tax breaks, believe it or not. As one of his areas for investment expansion is smaller fledgling companies which float on the Alternative Investment Market, it is no surprise that this is an area with much potential. Aim shares enjoy certain exemptions from capital gains tax and inheritance tax to encourage people to invest in these businesses.

Aim investments carry a significantly higher degree of risk due to the type of company that this market is made up from. Therefore, private investors may prefer to take advantage of the portfolio management services offered by several investment houses which specialise in Aim companies, combining their expertise with the tax advantages currently on offer.

Each qualifying investment held for over two years will fall outside an individual’s estate for inheritance tax purposes under the business property relief rules. In addition, Aim shares are also eligible for 100 per cent business asset taper relief, meaning that only 10 per cent capital gains tax will be payable on the sale of the shares.

On death within the first two years, the full portfolio can remain intact and be passed on to the surviving spouse so that the remainder of the two-year qualification period for inheritance tax relief can be met.

There has been much rumour and speculation that the Chancellor is plotting a raid on investors in the Aim market. The Treasury is said to be growing increasingly concerned that bigger companies are floating on the Aim, flouting the original theory behind the tax break.

There would seem to be some truth behind the Treasury’s argument. Since the Aim’s launch in 1995, the market has expanded at a considerable rate, especially in recent years. There are well over 1,000 companies listed, with a total market capitalisation of over 40bn and an average size of around 32m.

This potentially poses less investment risk but investors should be cautious as everyone within the industry is far too aware of the Treasury’s backtracking where it feels that too much advantage is being taken of a particular set of tax breaks.

In addition, the companies within an Aim portfolio may lose their eligible status by ceasing to trade, changing their business activities, being taken over by another company which is not qualifying or if their shares become traded on another stockmarket.

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Fundamental launches capital protected IHT portfolio

Fundamental is offering a capital protected inheritance tax planning service combining the benefits of 20 per cent income tax relief. Fundamental will invest in Aim companies to avoid IHT, and in companies qualifying for enterprise investment scheme income tax relief after three years. The minimum investment for a capital protected portfolio is 100,000. Fundamental director […]

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