Minimising a client's IHT bill

  • |
  • 42 mins 43 secs

Tutor:

  • James Rae, Investment Manager, Charles Stanley AIM IHT portfolio service
  • Lynne Rowland, Head of Personal Tax at Moore Kingston Smith

Learning outcomes:

  1. The key points to consider when it comes to considering a client’s IHT bill
  2. The AIM market and the options it provides to mitigate IHT
  3. How professionals can better support beneficiaries at a difficult time.

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PRESENTER: In this module we’re looking at IHT planning, with a particular focus on business relief and AIM stocks. Running us through the content, we’ve got Lynne Rowland, Private Client Tax Partner at multidisciplinary accountancy firm Moore Kingston Smith, and James Rae, Investment Manager for the Charles Stanley AIM IHT Portfolio Service. Well, let’s start by looking at the learning outcomes. Firstly the key points to think about when it comes to considering a client’s IHT bill; then the AIM market and the options it provides to mitigate IHT; and how professionals can better support beneficiaries at a difficult time. Well when they joined me in the Akademia studio I began by asking James Rae to set the scene on the level of IHT payments in the UK.

James, we’re talking about IHT, can we start by putting it in some sort of context, how much money are we as a country paying out in inheritance tax each year?

JAMES RAE: So it’s quite a bit. Last year in terms of 2018 to 2019 in terms of tax receipts it was around the £5.4bn mark, and it has been steadily increasing for a number of years. It rose from about £5.2bn the previous year to £5.4bn last tax year, and it’s actually been increasing over time at about a rate of about 10% per annum, which is quite interesting. However, in the context of tax receipts for the government, it isn’t actually that significant at all. If you took it against something like say income tax then you would find that income tax is actually around the £180bn mark, so significantly higher. Inheritance tax receipts actually only make up about 1% or in fact much less than 1% of the total tax take for the government.

PRESENTER: Well, Lynne, if it’s compounding at about 10% a year the amount of take, how does that compute with, or how does that marry up the fact I’ve heard a lot of commentators talk about IHT as a voluntary tax?

LYNNE ROWLAND: I think that that is a bit of a misconception to be honest with you, because a lot of people fall into that tax net of paying IHT, simply because of property prices, and property prices are on a tangible asset. And so if you’re meeting your correct obligations it’s not voluntary. All I would say is that the earlier you start to plan if possible you can mitigate what your legal obligations will be in due course, so it’s all about timely planning.

PRESENTER: So this idea that if you get your planning absolutely right, you’ll never have any inheritance tax to pay, that’s sort of bunkum.

LYNNE ROWLAND: I think it is a little bit optimistic and unlikely to happen.

PRESENTER: Well, James, you were mentioning a little earlier there that total tax revenue for the government around about or even just under 1% is IHT, do you see any evidence that government wants IHT to be a major source of revenue, what’s the mood music?

JAMES RAE: Well I mean it really depends on who actually is in government, I suppose, because there’s a very big difference right now between where the Conservatives sit and what Labour are currently thinking and what a Corbyn administration might do. Actually just a couple of days ago at the Tory Party Conference Sajid Javid came out and said that actually abolishing inheritance tax completely was maybe on his mind. That kind of thing has been touted before in the past, and it’s never really worked before. In fact I think Ken Clarke back in the ’90s actually said that he would quite like to get rid of inheritance tax completely.

So it’s actually that way going the opposite way around for the Tories. I don’t know if the Tories are perhaps thinking that they got a big boost in the polls when George Osborne back about sort of 12-13 years ago actually came out and said what I’d quite like to do is get about a million pounds out of inheritance tax for families, and maybe that’s his kind of thinking. Of course we don’t know what’s going to happen in terms of the political environment, but if there was an election, and let’s say there was in fact a Corbyn administration, then it would be entirely different. I think that a Corbyn administration would probably be trying to increase inheritance tax as much as they possibly could.

PRESENTER: And, Lynne, against that backdrop, just in terms of just overall principles, when you’re advising clients and there is this uncertainty around tax, what’s the best thing to do: is it plough on with the planning regardless, just stick with the rules you know today, or should you just leave any decisions for three to six months and see whether the world’s a slightly clearer place?

LYNNE ROWLAND: I think it depends on the individual circumstance. You have to do an amount of housekeeping shall we say on a regular basis anyway, and if somebody’s had a life event, or something that means that they need to review their asset base and what they’re planning to do with it, the fact that there may be some changes ahead simply means that they may need to do things in a bit more of a flexible fashion, rather than just following one path of planning or housekeeping, however you want to describe it. But I think that just keeping things as flexible as possible has got to be the way forward at the moment.

PRESENTER: And then when it comes to tax planning, a question I think everyone always wants to ask is what’s the distinction between tax planning around IHT and tax avoidance; are there some very obvious clear lines you don’t want to cross over?

LYNNE ROWLAND: I think that if you undertake aggressive tax planning, then that would seem to be outside the spirit of the law. It can be quite subjective, but we now have a PCRT or professional conduct in relation to tax that professionals have to follow. And so we do need to be transparent with what we’re doing with our clients. And so things that may have been acceptable some time ago may not be acceptable now within the spirit of the law. And it can be quite difficult sometimes because that can be a fairly grey area. Tax evasion obviously is a definite no-no. Tax avoidance or tax planning, I suppose it depends on the circumstances as to whether it would be acceptable.

PRESENTER: James, presumably one reason more people are finding themselves in the IHT threshold, or having assets left over is, we’ve alluded to it, it’s house prices have gone up and perhaps IHT allowances haven’t. To what extent would a lot of this problem around IHT just go away if the housing market had a correction?

JAMES RAE: Yes, I mean it would certainly make a massive difference. Obviously, as you alluded to, you know the fact that the nil rate bands have been frozen for some time, I think that the nil rate band has been frozen at £325,000 now since 2009, which was obviously a significant time, if it increased with inflation over that time, then obviously it would be significantly higher than that at the moment. Obviously now the residents nil rate band has come into play, and that has perhaps stopped the inheritance tax receipts accelerating quite as much as they have been in recent times. And that’s maybe we only saw the inheritance tax take go from £5.2bn to £5.4bn last year, rather than going up that train like level of 10% per annum which it was going at for some time.

PRESENTER: Well that’s a bit of the background on where we are with IHT. So, Lynne, when you’re sitting down with clients, tell us when is a good time to bring up the conversation of inheritance tax? Because also it’s a question about saying one day you’re going to die, what happens, have you thought about what happens next?

LYNNE ROWLAND: Exactly, and I think that long gone are the days when people think that they’re going to go on forever, unfortunately. But where we’re at is that the time that people are most engaged with it is when they have families, they’ve got an asset base, or somebody close to them has passed away, because that does start the thought process that maybe I need to be doing something myself. So there are a number of life triggers, but I would say that somebody in their 30s or 40s are certainly not too young to start thinking about inheritance tax planning.

PRESENTER: And when you say think about inheritance tax planning, how do you then do it? Because it must involve, could involve the law, it can involve financial planning, it can involve some quite tough issues around your relationship with your family, what sort of framework do you use to think about it?

LYNNE ROWLAND: I think that the way to get people’s attention and actually to get them to sit down and spend some time investing in this thinking is unfortunately to use a Doomsday scenario, which is if something happened to you and you weren’t around tomorrow, what would that mean for your family? And when they think about it in those terms, it does encourage them to come back to the table and plan a little bit more sensibly about the practicalities of it. So it’s a case of, you know, what is the financial provision that you have made, what is the legal provision that you have in place to make sure your wishes are following, and then is that tax efficient? So it’s a case of bringing several disciplines to the table and making sure that whatever objectives and plans that are discussed and agreed upon are acted in unison in the most efficient way. And that tends to give a lot of comfort once it’s in place, and it just needs to be reviewed every five years unless a significant life event happens in the interim period.

PRESENTER: So when you sit down with a client, I suppose one thing on how much money they’re planning on leaving is how much money they’re planning on using themselves. So how do you quantify in pounds, shillings and pence what the financial plan and goals are first of all?

LYNNE ROWLAND: Well, we work a lot with financial advisers, and it’s a case of building up a personal balance sheet. Somebody might come in and say Lynne I want to come and talk to you about inheritance tax planning. And they’ve got some vague idea that they’re going to have a problem, but they haven’t quantified what they’ve got, who they would want to benefit if they weren’t around and how they want to leave that legacy. I suppose an awful lot of thinking that’s got to be undertaken before you can put a structure in place. And it may be as simple as looking at the investment portfolio, looking at what assets they have, or whether they’re going to inherent from parents for example. There are an awful lot of parameters and different things to bring into the equation, and it’s not just a case of what do they want to do.

Most people come in and say I don’t want to pay any tax. And of course the fact is that when they die inheritance tax isn’t their problem anyway. It’s just making sure that they leave a legacy and they leave instructions that are very clear for whoever is dealing with matters after they’ve passed away. And that is where we often come in unfortunately where somebody hasn’t made that provision and we’re helping the family to get over a shock at a very vulnerable time, and we’re dealing with somebody that may have just lost a loved one and does not know where to turn, and then it’s a case of becoming a little bit of a detective working out what assets they’ve had, interacting with any financial advisers in place and making sure that all the legal niceties are undertaken as well.

And that can be quite a job at a time when families are not really thinking straight about well where’s that piece of paper, or I’m not sure. I know the mortgage got paid but I don’t know how, and it’s some very practical issues that come back under this banner of inheritance tax planning. You get the planning in place at a very early stage, you review it and then when the time eventually comes hopefully it is making life much easier for the family that’s left behind at a very different time, and that’s all we can do as advisers.

PRESENTER: And, James, from your point of view, I mean you’re running portfolios of shares in a tax efficient fashion as part of an adviser’s client’s overall portfolio. Again, have you come across instances, without going into people’s personal details, where somebody’s died and suddenly somebody else has inherited essentially the portfolio you’re running and they’ve had no idea that that’s what they’ve got? They’ve looked at it and said well this is no use I don’t want it in that. There’s this sort of lag between what was good for the previous person and what’s good for the individual that’s inherited now.

JAMES RAE: Yes, that happens quite often. Particularly when it’s passing through the generations, there’s quite often a lack of understanding of what’s been left behind, and therefore we try to make it as clear as we possibly can in various letters etc. and try to communicate as clearly as possible about what tax breaks have been achieved by the person who’s been deceased and what they can benefit from.

PRESENTER: And, Lynne, I mean family dynamics are obviously very important part of this, I mean do you advise clients to I suppose have a very broad family conversation with this. Particularly as families can be quite spread out, there’s often second spouses. I mean unfortunately we’re in a position now I suppose where more and more people as they get older perhaps suffer from things like dementia. I mean these are difficult issues, but it’s not just the one person who’s got the money that needs to be involved in the conversation.

LYNNE ROWLAND: Absolutely, communication is key. Sometimes, you mentioned about vulnerable people, it’s not necessarily older people, somebody could have had an accident and unfortunately it happens, but you have to establish who is your client? And that is very difficult sometimes, it’s a bit grey, because you could be advising a son or a daughter, they may have power of attorney for example to deal with their parents’ affairs, but it then can be quite difficult because are they undertaking tax planning for their benefit, because of course their parents won’t pay inheritance tax, or are they doing it because their parents would have expected them to do that? So there can be quite a difficult conversation to understand who the client is and to take correct instructions. But ultimately you have to look through the relationship and make sure that correct permissions are in place.

But the best scenario is when you have more than one generation sat around the table, all engaging, because sometimes the reluctance to have those conversations is because parents may see that wealth as a bit of a burden and they don’t want their children to know what they’re going to inherit too soon because they feel it’s going to take away maybe an entrepreneurial spirit or incentives to get on with their own lives. So each scenario, each family is going to be different, but the earlier you can have those conversations the more successful the succession would be. And then you can do it in plenty of time to make sure that if there is a gifting scenario, where some people want to survive, or have to survive seven years for it to be successful, you’ve got time to do that, rather than trying to do it at the last minute.

PRESENTER: James, I know you’re specialising around AIM shares, so I’ve got a couple of very specific questions to ask you around that. But before I do, can you just lay out for us why investing in AIM shares, what are the benefits potentially that brings to somebody when it comes to IHT planning?

JAMES RAE: Well, as you say, Mark, it’s only one part of the whole solution for people. Any investor has to think about everything when they’re inheritance tax planning, and that’s why it’s best to consult with other experts in different fields, and particularly financial advisers and tax advisers, etc. But there is a particular benefit to AIM. AIM qualifies for what’s called business relief, and if you invest in AIM shares for two out of the last five years, or indeed if you invest in any business relief qualifying asset for two out of the last five years, and at the time of death, then it is outside of your estate. And this can be very useful, particularly for somebody who’s perhaps sold their business, which qualified for business relief, then they’ve got that in cash. And then after a couple of years they think oh well it would be quite useful to get that business relief back actually, then they could go and invest in AIM shares. And actually if it was only a couple of years later, then it would qualify immediately for business relief, even if they were to get run over by a bus or something like that. So it’s quite useful.

PRESENTER: So this is, sorry.

LYNNE ROWLAND: I was going to say that dovetails in very nicely with the fact that depending on somebody’s state of health, it may be that they’re not likely to survive the seven years that you would for a normal gift. So depending on the type of asset base that they held, having AIM stock could work very nicely as part of an overall strategy or planning that they wish to undertake.

PRESENTER: But I suppose this then brings up the issue of to what extent are these particular tax breaks that you’ve mentioned, James, tied up inextricably with the type of investment? I mean you’re going to be having to take quite a lot of investment risk, particularly if it’s moving between generations, is that necessarily an investment risk they want, do they have the same time horizon? What are some of the pros and cons that throws up?

JAMES RAE: So there’s certainly some pros. Well the pros to it are, as Lynne was alluding to, that there’s a degree of speed to this. A lot of clients come to us and they’re actually doing it almost as a last hoorah in terms of oh dear, I haven’t planned very much, maybe I should have done something earlier about inheritance tax, and now they’re thinking OK I’ll go into this because it’s quite quick, because they can get out of inheritance tax within two years, so that’s quite good. The other good news is by investing in AIM shares, it’s very flexible, and you maintain control of the assets. It’s not like gifting, and it doesn’t have the complexities of going into trust or something like that. If a client were to open up an AIM portfolio with myself, then it would be very flexible. And if they wanted the money back for care home fees or whatever it might be, then they would just need to pick up the phone and then I’d be able to get that back to them.

However, along the way they are investing in AIM shares, which are inherently more volatile. They don’t have to hold the same AIM shares throughout the entire period, so I could go and invest in one AIM share such as a Fever-Tree for instance for a year, and then I could go and sell that down after a year and replace it with a company such as Young’s Pubs for instance, and then if I held that for another year, then that would be the two years done so to speak. So we can chop and change portfolios. But at the end of the day yes we’re investing in the alternative investment market, which is a junior exchange on the London Stock Exchange. These companies tend to be less liquid certainly that their main market peers, and therefore this simply means that they are inherently more volatile.

PRESENTER: So, Lynne, how do you balance up the pros and cons of something like AIM? As you said on the one hand it’s two years and you’ve got your reliefs rather than perhaps waiting seven with gifts; but on the other hand it is the more risk and reward-oriented end of the asset spectrum.

LYNNE ROWLAND: Yes, and of course I’m not a financial adviser, so I would never say to somebody that’s the strategy that you need to follow, simply because you’re not likely to last seven years if you want to make a gift; however, if somebody is an entrepreneur, or is somebody has already got a share portfolio, then they’re used to looking at shares, they’re used to looking at the stock market. And people like to make decisions, and sometimes people like to think that they’ve provided funds to help a business get off the ground. So it’s not just a case of yes there are some attractive IHT reasons for doing this, there are other reasons as well. But I suppose if you’re looking at a client purely from the tax side of it, and if somebody hadn’t invested in that type of portfolio previously, what they’d have to get comfortable with is if they didn’t do anything, then their heirs might receive 60% after they pay 40% tax. Or they could potentially invest in something that could really fly, make the family a lot of money and not have to pay any inheritance tax at all. That risk/reward is something that is quite subjective and it would be subject to some specialist input from a financial adviser. But that’s the sort of broad spectrum if you like of the options that they’d be considering.

PRESENTER: You mentioned a little earlier the importance of reviewing people’s circumstances, I think you said every five years.

LYNNE ROWLAND: I would say that would be a minimum. So my rule of thumb would be if everything stays the same look at it every five years. Why you would look at it more frequently is if there was a change of circumstances, whether that’s a change of law, or whether a change in the client’s health, maybe their marital status, or simply because they feel that they’ve changed their mind about what they want to happen with their money. So that may not be driven by anything specific, it just may be that they’ve just had a change of heart in their objectives. So I think every five years, even if it’s just a case of let’s have a look, make sure this is still relevant, still as tax efficient as you intended, and if so great, then have another look in five years’ time unless something happens in the interim. But I think it can’t just be a case of you do it once and don’t return to it.

PRESENTER: And how does that work, James, on the investment side of the portfolio? Again imagine somebody is reviewing their overall IHT plan, how often should they be reviewing their IHT AIM portfolio?

JAMES RAE: Yes, well I mean they should definitely be looking at it fairly regularly. But what tends to happen with us is that we are simply, as I said earlier, we’re just doing one small slice of inheritance tax. So when people come to us I think that they have to accept that for an AIM portfolio that they’re probably going to hold onto those assets most of the time until they pass away. So there needs to be a degree of comfort I suppose there that actually they don’t really need those assets. And indeed they do have the risk capacity that if those assets were to fall in value significantly, perhaps by more than 50% even, that it wouldn’t actually affect their standard of living. Because ultimately with the rules the way they are, they need to pass away holding these business relief qualifying assets. In the interim if they wanted they could go, they could hold the AIM shares and then go back to cash, and then go back into AIM shares. But with AIM shares the way they are, being harder to trade, then that could be, that might not be the most cost effective method. So normally we would expect somebody who comes onboard with us to actually hold the AIM shares for the long term and indeed often until they pass away.

PRESENTER: And you mentioned there a little earlier a couple of stocks there, people like Young’s, Fever-Tree well-known brands in the UK. Can you give us some idea of just exactly what’s on the AIM market? If you had to give the elevator pitch on how big the AIM market is, the type of companies on it.

JAMES RAE: And what it is yes.

PRESENTER: Yes.

JAMES RAE: Of course yes. So AIM has always been known as quite a volatile exchange, and it was actually, it came to be in 1995, and actually there were only 10 stocks on AIM at the time. And then it went through a couple of very volatile periods, one of which was the dotcom bubble, and then of course there was the financial crash, and obviously AIM shares fell significantly during that period. AIM has actually had more companies on it in the past. At its peak it had 1,700 companies back in 2007. Now I feel that AIM has matured significantly. The total in terms of market capitalisation of AIM is actually larger than ever, the total market capitalisation is above £100bn at the moment, but it’s come down in terms of the number of companies from 1,700 to today being 900 companies. So on average you’re looking at a market capitalisation of about £100m per company.

So I suppose when you look at it that way, you can see that these companies aren’t, they’re not minnows. And often hopefully with those examples that I was describing before, you can see that these companies are often actually companies that you interact with every day. And so it’s not EIS investing, there are many companies that many investors who aren’t even seeking inheritance mitigation come and invest in, fund managers come and invest in the market as well.

PRESENTER: And so from a market cap of £100m - that sounds like small cap stocks - are most of them investing in the UK, are you buying UK plc when you buy AIM stocks, or is there quite a lot of overseas businesses here as well?

JAMES RAE: There are some overseas businesses, but there’s certainly a big domestic bias in AIM shares. If I was to estimate across the AIM market then I would say about two thirds of revenue is generated within the UK, whilst only about a third of revenue is generated abroad. And of course you would probably expect that, because these are younger companies that haven’t spread their wings as such as yet and haven’t expanded into international markets as much as their larger cap peers. So there’s quite a wide variety. But there are indeed some companies that are actually based in the States or indeed elsewhere which are listed on AIM as well.

PRESENTER: Now, the final part of this programme, I wanted to look a little bit ahead, and we touched on it earlier, Lynne, but it’s really looking out on the future of tax planning. We had the Office of Tax Simplification brought out a report I think in July this year, which had some views around IHT. What are the key findings or the key things it’s looking at, and what does that mean for planning now?

LYNNE ROWLAND: I think that it was a recommendation. There was a specific brief given to the Office of Tax Simplification. And part of that brief wasn’t to look at alternatives to inheritance tax; it was simply to look at how it could be made more easily understood. I think there’s universal recognition that it is misunderstood, it is complicated and it hasn’t been reformed for some time. And what we’ve had over the last couple of years are layers added to it, in theory to simplify it or to broaden reliefs, and all that’s done is added to the complexity, rather than made the tax something that is easy to understand and easy to quantify. And I think the other misconception with inheritance tax is that it’s sometimes payable on lifetime transfers, not just when somebody passes away. But clearly most of the tax is actually payable when somebody has died.

And especially if you’re dealing with families and a close loved one has passed away, the fact that you’ve got to do all this administration and pay tax within six months of the date of death is very onerous, which is why a lot of people fall foul, and even on the simplest estates mistakes are made and people feel that they shouldn’t have to pay for professional help when actually it may just be a property. But the forms and the process is so complicated that it’s not fit for purpose. And I think that there were some statistics that came out in the OTS review that one of the things that was noted that many estates have to file returns, even though there is absolutely no tax to pay. So who is benefit from that? It puts added stress onto families when they’re at a very difficult time anyway and it’s not serving any purpose. It’s not helping the tax take. It’s just not what needs to be done at that time.

PRESENTER: I’d like to come back in a minute if I may to supporting beneficiaries and that part of the advice process; but just before I do, on this issue of the OTS, James, is there anything in it specifically around business relief that has caught your eye, and might have an impact on things like AIM portfolios?

JAMES RAE: Yes, well it covers quite a broad range of issues. There are 11 recommendations in there, and it is worth going and looking that up online. And it’s very easy to find if anybody wants to go and review what those 11 recommendations are. One of which will affect business life. And that is that anything that is exempt from inheritance tax, when somebody passes away, will no longer have the capital gains relief in the same way. At the current time what happens is that capital gains are effectively reset or book costs are reset when somebody passes away; however, what the recommendation is in the Office of Tax Simplification review is that if there is something which is exempt from inheritance tax then perhaps the beneficiaries shouldn’t get the benefit of both having the capital gains tax relief as well as the inheritance tax relief on top of that and therefore that will probably affect it. Of course this is only a recommendation and we wait to see whether HMRC do anything about that.

There was one specific point, which was an observation from the Office of Tax Simplification, and that can be found, it’s bullet point 5.19 from memory. Anybody who wants to look it up can have a quick look. But that basically says that they are questioning whether business relief is actually required for AIM companies where there isn’t a significant amount of family ownership. And this obviously has concerned quite a lot of investors. However, what I would flag is that this is simply an observation, it isn’t a recommendation, and there have been many flags before on various tax reliefs being lost, and of course if we moved every single time that something like this was flagged then we’d be significantly worse off.

In the bullet point before actually they do also say that the government continues to be extremely supportive of business relief on AIM, because when there was the patient capital review, which was back in 2017, the government stated as such, and they said that it had been a very good way of supporting these smaller businesses.

PRESENTER: And, James, thank you for that. And just to let you know we do actually have a link to that Office of Tax Simplification report below the player, so if you are interested please do have a look at that. Lynne, you mentioned there the importance of supporting beneficiaries, so can you just run through some of the crucial things to be thinking about if you’re an adviser, somebody’s passed away, they’ve got beneficiaries, what are the most important things to be aware of?

LYNNE ROWLAND: Apart from the very practical issues of making sure that somebody knows where a will is, or whether there is a will in existence, it’s making sure that once the assets have been determined, that those that are closest to or the intention was to benefit that they can do so in a very tax efficient way. Because you have two years from the date of death to vary a will, or an intestacy, and sometimes the people that are going to inherit may not need that money, and so it’s a great opportunity to think about generation skipping, and it’s perfectly legitimate and legal and accepted to do that at that stage. If the assets are going from husband to wife for example, then there’s no inheritance tax anyway.

But if it’s going from a mother or father down to a child, then there would potentially be inheritance tax. And that’s the time when you need to be considering as a family whether that is the best route for that money or those assets. And it’s, you’ve got two years, so it’s not something that you have to do within the first couple of months, such as determining whether there’s any inheritance tax to pay, but again you need your advisers coming in, because you need to look at what other assets those people that would be receiving or giving up have and just to make sure that that makes sense for everybody concerned. And it has to be at the consent of all the potential beneficiaries as well if it’s going to impact on what they would otherwise receive.

PRESENTER: So you’ve got that ability to help move a will around a little bit there. James, from your point of view, I mean we’re almost out of time so just pulling some of these strands together. What are your thoughts, I mean in summary, as to why advisers should really get their heads around and get on top of IHT, and as part of that think about business relief?

JAMES RAE: Well, it’s obviously something which is a very sensitive issue for families. Obviously they’re at a stage where they’re very emotional, and I think when you help out somebody when they’re in that kind of place, then obviously it’s remembered. And also this is the opportunity for advisers to try and keep clients. Ultimately the client has perhaps been the father or the mother and they then have the opportunity to continue to help the younger generations thereafter. And therefore it’s a significant milestone in terms of keeping their client bank, so definitely worth considering as well from that perspective.

PRESENTER: And are there any hindrances if you’ve got, I mean your particular area of specialism, AIM shares, of then moving those into other things that beneficiaries might want, whether it’s turning it into cash because you want a property, maybe it’s funding a pension, putting it into ISAs, saving for university, is that all very easy to do from an AIM portfolio?

JAMES RAE: It’s all very flexible. Ultimately often what will happen if there’s a husband/wife duo, and they have mirror wills, is that if the husband say who was holding AIM shares didn’t survive for two years, then actually it could pass into the wife’s name without resetting the two-year clock, which is very useful, i.e. Mr Smith could hold AIM shares for a year, and then he could pass away, and then it could pass to Mrs Smith. She could hold for a year, and then that would be the two years done. So in that regard it’s very flexible. Indeed it can work that way in an ISA as well. AIM is very useful for ISAs because actually it’s the only way of getting ISAs out of inheritance tax. And of course we’ve all loved our ISAs all through our lives, but ultimately it will be subject to inheritance tax. With the additional permitted subscription it will be able to pass from husband to wife pretty easily.

If the two years have been done, then it’s worth considering what the beneficiaries would like to do. Potentially at that point actually it might be worth considering getting a deed of variation if there are mirror wills in place, because ultimately the two years have been done. If it’s passed from Mr Smith to say Mrs Smith, then Mrs Smith would have to hold until her death for these to be outside of the estate; however, if you were to get a deed of variation, and of course that’s not for me to advise on, but at that point it could potentially pass down to the beneficiaries if they were ready for the money at that stage. And then of course you would be able to derisk the portfolio at that stage, and we would be able to just sell down those AIM shares and pass it to the beneficiaries as cash or however they want it.

LYNNE ROWLAND: And I just would like to clarify the point that James made there that of course there is no inheritance tax if the ISA is bequeathed from husband to wife, it’s only if it then goes to a third party that there would be tax, and that’s where the AIM stock can come in very useful.

PRESENTER: And could you just run through that point about how you can, that link between ISAs and AIM shares, how does that work exactly so the ISA isn’t eligible for IHT?

JAMES RAE: So an ISA, if it’s just left on its own, and it’s say a cash ISA or indeed it’s invested in FTSE 100 stocks for instance, then it would be subject to inheritance tax. And quite a lot of people don’t actually realise that. Mainly because the ISA, you often look at it and people have thought well there’s no income tax, there’s no capital gains tax, so they’re assuming that it’s all tax free, when that in fact isn’t the case at all. So it is perhaps worth considering converting that into an AIM ISA, where you just go and invest in 20 to 25 AIM stocks, and then in the same way after two years it would be outside the estate.

PRESENTER: So cash in your FTSE 100 and buy AIM stocks, or turn it from cash into AIM stocks and it becomes an AIM ISA.

JAMES RAE: That’s right, yes.

PRESENTER: And, Lynne, a final thought from you. I mean we’ve covered a huge amount of ground here, but if you had some key takeaways and some tips on if you’re an adviser how to get more information that you need on IHT planning, what would it be?

LYNNE ROWLAND: I think everybody is used to every year thinking about what do I have to return to HMRC as far as my personal taxes is concerned. They don’t go through that same thought process or methodology when they’re thinking about wider estate planning. It tends to be driven by an event, or as I mentioned earlier when somebody close to them has passed away. And if we can get our clients to think a little bit more logically and more regularly about OK that’s great news, you’ve got a promotion, or you’ve won a huge piece of work, or something in your working life, or maybe something’s happened and you’ve inherited, now is the time, let’s sit down, doesn’t matter whether you’re 20, 30, 40 or 50, but we need to think about inheritance tax.

We need to think about unfortunately that Doomsday scenario, and then just make absolutely sure that whatever you would want to happen to your assets is actually going to be implemented if you’re not around, or if you’re not capable of making those decisions. So it’s making sure that you have documented, discussed and communicated. That’s the key message.

PRESENTER: We have to leave it there. Lynne Rowland, James Rae, thank you both very much.

JAMES RAE: Thanks.

LYNNE ROWLAND: Thank you.

PRESENTER: In order to consider the viewing of Akademia videos as structured learning, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this module you should be able to understand and to describe the key points to think about when it comes to considering a client’s IHT bill; the AIM market and the options it provides to mitigate IHT; and how professionals can better support beneficiaries at a difficult time. Please complete the reflective statement to validate your CPD.

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