Inheritance tax receipts keep on rising. The latest Government figures showed a near 12 per cent year-on-year increase in 2012/13 to almost £4bn, significantly ahead of the previous year’s 8.6 per cent growth. The period also saw an increase in the percentage of deaths that resulted in an IHT charge levied on the estate.
But these trends are set to change following announcements made in the summer Budget, right? Over the next five years, thresholds on IHT will rise to £1m per couple that pass on their family home. Surely this measure will result in a drop in the number of estates liable to IHT and, as such, the value of IHT receipts?
Not quite. The policy may have been heralded as a long-awaited measure to protect swathes of middle England “unfairly” penalised but the reality is the IHT net is set to go on catching more people.
The Government’s own forecasts show almost 60,000 estates will be liable for IHT by 2020/21, which represents an approximate doubling of today’s figures. Over the same period, IHT receipts are forecast to rise from just over £4bn in the current tax year to almost £6bn.
There could even be a risk the £1m threshold will lure some into a false sense of security that sees them not planning properly because they do not expect to be affected. It may sound like a big number, after all, but rising asset prices, particularly property, could catch out the unprepared. The role of advisers to help prevent this from happening through carefully considered IHT mitigation strategies is vital. So, what options are available?
The 55 per cent tax charge on passing on pension assets at death aged 75 or over has been reduced to 45 per cent and will come down further for most from April 2016 when it will be linked to a beneficiary’s income tax rate. In addition, the contribution limits have continued to be lowered, as has the tax-free cap on pension pots.
Trust-based planning involves assets being held by trustees on behalf of beneficiaries. When it comes to IHT, it typically takes seven years for trust assets to be passed outside an estate. By handing assets to trustees, a person also technically loses ownership of, access to and control of their assets.
Business relief underpins a wide range of IHT planning strategies, from Enterprise Investment Schemes, Seed Enterprise Invest-ment Schemes and investment in other businesses that carry out qualifying trades to Alternative Investment Market shares. Investors using business relief retain access to and control of their assets, providing immediate advantages over trusts. IHT exemption using business relief is also granted after just two years, provided the qualifying investment is held at death.
EIS and SEIS
EIS and SEIS offer complete exemp-tion from IHT if held for at least two years as long as the investor still holds their EIS qualifying company shares at death. EIS and SEIS also offer 30 or 50 per cent income tax relief and no capital gains tax on profits. Investors can apply for loss relief in the event their investments fall in value. However, it should be remembered these schemes exist to encourage investment in small, unlisted companies and the generous tax relief available is designed to compensate investors for taking on the extra risk.
The Aim market is less liquid than larger stock exchanges and not all Aim-listed companies are eligible for business relief. However, the average market capitalisation of Aim shares continues to rise, exceeding £70m at the end of May, which indicates the growing depth and breadth of the market. A further advantage of Aim shares is that they can be held in an Isa, making them free of capital gains and income taxes.
Other business relief qualifying trades
Investment in companies consid-ered lower-risk than those usually found in Aim or EIS portfolios is another approach. Typically, these investments are made in relatively stable business sectors such as land and property, renewable energy and financing. A similar approach involves establishing a private limited company in an individual’s name to invest in business relief qualifying companies. This method has the added benefit the company can be passed to beneficiaries as a “going concern”, which can continue to trade indefinitely in business relief qualifying companies.
Jonathan Gain is chief executive at Stellar Asset Management