IHT

[UnclePhilip]

I have become increasingly concerned with IHT. Allowing for our 2 nil rate bands, and our 2 residence NRBs, taking us to £1,000,000, we still face several hundred thousands in IHT.

Having read the excellent 'How to save IHT' by Carl Bayley, and currently taking advice and proposals from a wealth planning co, I'm looking at options.

Firstly, we're thinking of transferring an investment property into a discretionary trust with our 3 adult kids as beneficiaries. Then hopefully surviving 7 years....

We're also looking at our needs with a view to seeing how much we can safely give them.

The thing that's exercising my mind now is our investment portfolio. This is in global equities. One proposal is to transfer some of this to AIM shares, perhaps through Octopus IHT service. When I blanched at the idea of moving from global equities to IHT exempt AIM shares, the equation discussed becomes this: do I think that an AIM portfolio will do at least 60% as well as current global equities?

If so, that 40% IHT saving will swing things. Plus, and without getting too personal, a 2 year survival is a lot more realistic than a 7 year survival, particularly for a cardiac arrests graduate coming out of a recent relationship with cancer....

I'm still waiting for the blood circulation to restart. But what thoughts have others had with regard to these matters?

Uncle

[Lootman]

I do have and run a portfolio of about 20 qualifying AIM shares, with a view towards mitigating IHT. A few general comments:

1) I feel sure you know this but not all AIM shares qualify. If the principal business activity is finance or property then it likely won't be qualifying. I am not aware of an exhaustive list which tells you which is which, but common sense will usually be reliable and I go for companies that make "real" things or provide real services..

2) The qualification status of an individual AIM share can change. Two of mine ceased to be qualifying. In one case because it listed on another exchange as well, and in the other case it went private. So you need to keep an eye on them for corporate actions that effect their status.

3) I didn't feel comfortable putting more than 10% of my investable net worth into AIM shares, so it will never be a complete solution in my view.

4) They are volatile. I have had one go to zero and a few others are now worth less than I paid for them a few years ago. Then of course I have a few 3 and 4 baggers. With that kind of distribution of outcomes you need a reasonable spread of them.

5) I document each share, particularly with the dates of purchase, and where I exchanged one AIM share for another, which carries over the benefit. This list is available for my executors as otherwise it might be hard for them to figure all this out.

[wanderer]

I have been mulling over similar thoughts to the OP although any action by us would be some years away and maybe the tax rules will have changed before then. For what it's worth, my thoughts were:

- the problem with putting anything into trust is the horrible faff of paperwork, tax reclaims etc. Are your children up to managing this or will they end up paying a lot of fees to solicitors/ tax accountants to manage those affairs?

- any property held on trust for the benefit of an individual would disqualify them from being a"first time buyer" I think, so this may be an issue if your children were planning to use LISAs or HTBISAs to purchase a property? Not an issue if they are already property owners of course

- Like you, I think the 40% discount argument on AIM stocks is compelling in terms of being a material risk offset.

- The AIM exemption from IHT might be removed in the future. But as noted on here in a different but recent post, once you have owned them for 2 years you can then lock in the IHT benefit permanently against any future changes in the IHT/AIM exemption rules by transferring ownership of the 2 yesrs-old AIM stocks to your children immediately on 2 years of ownership.

- Heresy for these boards perhaps, but there are professional services which help with managing AIM investments to minimise IHT. They seemed like quite a good thing to me, at least to understand the approach (and maybe then mimic alongside with a private portfolio.) Octopus do one and there are others also listed on Wealth Club.

- EIS/SEIS shares are also IHT exempt after a couple of years, so that's another option with good upfront tax relief if you can offset it against income.

[monabri]

https://www.telegraph.co.uk/tax/inherit ... aul-death/

"Tory leadership contender Liz Truss has promised to review inheritance tax, but what changes could she make?"

"When questioned at the first Tory hustings in Leeds last night, Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

The article suggest several possibilities....

No real point in outlining them as it's all guesswork!

[Lootman]

Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

Mixed feelings. I do think IHT needs to be reviewed, changed and simplified even if it is not going to be "axed" as the headline shouts.

But such changes can be a bane for anyone trying to do long-term planning such as the topic here. I have held AIM shares for this purpose for a decade now, foregoing other investment possibilities. If that provision went away that was all effectively a waste. Although I suppose it was a form of life insurance for the duration.

I would accept that loss if the overall changes led to a less punitive structure for IHT e.g. higher nil-rate band and a lower rate. And simplification should be a goal as with any type of tax. But Truss may only have 2 years to do this so I am not holding my breath.

Anyway if AIM shares were to lose their special status then their prices could fall significantly without the support of those who buy and hold them for that reason. And that would be an ugly end to the strategy.

[Dod101]

Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

Mixed feelings. I do think IHT needs to be reviewed, changed and simplified even if it is not going to be "axed" as the headline shouts.

But such changes can be a bane for anyone trying to do long-term planning such as the topic here. I have held AIM shares for this purpose for a decade now, foregoing other investment possibilities. If that provision went away that was all effectively a waste. Although I suppose it was a form of life insurance for the duration.

I would accept that loss if the overall changes led to a less punitive structure for IHT e.g. higher nil-rate band and a lower rate. And simplification should be a goal as with any type of tax. But Truss may only have 2 years to do this so I am not holding my breath.

Anyway if AIM shares were to lose their special status then their prices could fall significantly without the support of those who buy and hold them for that reason. And that would be an ugly end to the strategy.

Well Liz Truss may not become Prime Minister but even if she does I suspect that she will have a lot of rather more pressing issues to contend with before considering IHT so I doubt that it is worth worrying about.

Dod

[ursaminortaur]

Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

Mixed feelings. I do think IHT needs to be reviewed, changed and simplified even if it is not going to be "axed" as the headline shouts.

But such changes can be a bane for anyone trying to do long-term planning such as the topic here. I have held AIM shares for this purpose for a decade now, foregoing other investment possibilities. If that provision went away that was all effectively a waste. Although I suppose it was a form of life insurance for the duration.

I would accept that loss if the overall changes led to a less punitive structure for IHT e.g. higher nil-rate band and a lower rate. And simplification should be a goal as with any type of tax. But Truss may only have 2 years to do this so I am not holding my breath.

Anyway if AIM shares were to lose their special status then their prices could fall significantly without the support of those who buy and hold them for that reason. And that would be an ugly end to the strategy.

Well Liz Truss may not become Prime Minister but even if she does I suspect that she will have a lot of rather more pressing issues to contend with before considering IHT so I doubt that it is worth worrying about.

Dod

Although she coukld screw things up she certainly looks like she will be te next PM from the polls of Conservative party members.
The policies she has announced so far though don't look like they will improve things with the EU or other problems so she might well be looking for something she could present to the electorate as a winning policy as the election is only two years away. Hence making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

[Dod101]

Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

Mixed feelings. I do think IHT needs to be reviewed, changed and simplified even if it is not going to be "axed" as the headline shouts.

But such changes can be a bane for anyone trying to do long-term planning such as the topic here. I have held AIM shares for this purpose for a decade now, foregoing other investment possibilities. If that provision went away that was all effectively a waste. Although I suppose it was a form of life insurance for the duration.

I would accept that loss if the overall changes led to a less punitive structure for IHT e.g. higher nil-rate band and a lower rate. And simplification should be a goal as with any type of tax. But Truss may only have 2 years to do this so I am not holding my breath.

Anyway if AIM shares were to lose their special status then their prices could fall significantly without the support of those who buy and hold them for that reason. And that would be an ugly end to the strategy.

Well Liz Truss may not become Prime Minister but even if she does I suspect that she will have a lot of rather more pressing issues to contend with before considering IHT so I doubt that it is worth worrying about.

Dod

Although she coukld screw things up she certainly looks like she will be te next PM from the polls of Conservative party members.
The policies she has announced so far though don't look like they will improve things with the EU or other problems so she might well be looking for something she could present to the electorate as a winning policy as the election is only two years away. Hence making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

It does not though, I think affect very many people and so is not in any sense a vote catcher, I think. The talk everywhere is the cost of living and in particular fuel. No one I know says 'Wow, just look at the IHT levels!'

Dod

[ursaminortaur]

Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

Mixed feelings. I do think IHT needs to be reviewed, changed and simplified even if it is not going to be "axed" as the headline shouts.

But such changes can be a bane for anyone trying to do long-term planning such as the topic here. I have held AIM shares for this purpose for a decade now, foregoing other investment possibilities. If that provision went away that was all effectively a waste. Although I suppose it was a form of life insurance for the duration.

I would accept that loss if the overall changes led to a less punitive structure for IHT e.g. higher nil-rate band and a lower rate. And simplification should be a goal as with any type of tax. But Truss may only have 2 years to do this so I am not holding my breath.

Anyway if AIM shares were to lose their special status then their prices could fall significantly without the support of those who buy and hold them for that reason. And that would be an ugly end to the strategy.

Well Liz Truss may not become Prime Minister but even if she does I suspect that she will have a lot of rather more pressing issues to contend with before considering IHT so I doubt that it is worth worrying about.

Dod

Although she coukld screw things up she certainly looks like she will be te next PM from the polls of Conservative party members.
The policies she has announced so far though don't look like they will improve things with the EU or other problems so she might well be looking for something she could present to the electorate as a winning policy as the election is only two years away. Hence making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

It does not though, I think affect very many people and so is not in any sense a vote catcher, I think. The talk everywhere is the cost of living and in particular fuel. No one I know says 'Wow, just look at the IHT levels!'

Dod

The problem though is that nothing she has put forward so far will help with that - and arguably her tax cut proposals will fuel inflation and make things worse. So she may well be looking for other things which might well include fiddling with IHT which could boost her popularity with some people.

[scrumpyjack]

I too would avoid trusts!

Also I would not go for Aim shares. Overall their performance is not good and that poor performance might offset any IHT savings in the end. These ‘schemes’ will take a lot in fees.

Obviously one strategy is not to draw anything from pensions but live off other assets. The pension assets can then go to your heirs without IHT as they do not form part of your estate.

If your assets are pregnant with large taxable gains, that washes out on death and to some extent the CGT savings from keeping them will offset some of the IHT.

If you trust your children you can give them assets now and hope you live 7 years. Obviously use the gifts out of income exemption if possible.

Lastly just accept that death and taxes are inevitable!

[Lootman]

making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

It does not though, I think affect very many people and so is not in any sense a vote catcher, I think.

I believe that both can be true at the same time. So it is true that only a minority of estates currently pay IHT. But I have seen polls showing that a majority of voters disapprove of it.

It could be that voters worry that they will in the future be caught by it, especially with the valuations of houses in London and the South. It could also be that people have a negative gut reaction to the idea that there is a de facto tax on dying that can take up to 40% of a family's wealth. It is one of the very few taxes based on wealth rather than on transaction value.

I suspect raising the nil rate band to a million per individual would improve the situation of a good number of voters. And might stop us feeling like we have to jump through hoops to avoid it.

[scrumpyjack]

I suspect raising the nil rate band to a million per individual would improve the situation of a good number of voters. And might stop us feeling like we have to jump through hoops to avoid it.

If that were combined with closing or reducing the most costly loopholes (eg BPR), it would be more politically acceptable. I recall that an all party committee of MPs had recommended that all such reliefs should be abolished and the IHT rate could then be cut substantially. It does not seem fair that wealthier people can avoid the tax simply by holding certain types of asset. They could also get rid of the complicated family home relief at the same time as raising the tax free allowance.

[kempiejon]

If your assets are pregnant with large taxable gains, that washes out on death and to some extent the CGT savings from keeping them will offset some of the IHT.

I hadn't really thought of this angle before. I selling down unsheltered holdings and harvesting CGT as I go each March for new ISA and pensions contributions. Spare investment funds I add to unsheltered accounts, I can sell profits in new tax years to fill the SIPP and ISAs so I doubt inheritance tax will be a problem to my beneficiaries but it's a technique I hadn't thought off. Much like a chap I know who rationalises buying those expensive guitars at 40% off.

I did try to look for what proportion of the country now pay IHT compared to historic periods, I read only 5% 2014 rising to 9% 2017 but wanted some sources. The ONS seems to have amounts of tax raised https://www.ons.gov.uk/economy/governme ... /lson/edp2 .
Wasn't raising the limit last done by Cameron and gang that being the first time in years? I'm pretty sure the allowances have massively lagged inflation. And expect property has outstripped inflation.

[Lootman]

One other thought I have about using AIM shares for this purpose is that, if you have a choice about it, then it can be better to hold the AIM portfolio in a taxable account rather than an ISA. Reasons:

1) If you are going to hold them until death, then the CGT liability will be wiped out then. So you will only pay income tax on the dividends, and many AIM shares don't pay dividends anyway, or only pay low dividends. So you won't pay much tax on them.

2) Conversely if you have bad luck and one of your AIM shares loses most of its value, at least you can utilise that loss to offset gains elsewhere, which you cannot do in an ISA.

3) If you intend to gift the AIM shares after the 2-year qualification period, thereby sealing the IHT benefit for good, then it is easier and better to gift from a taxable account than from an ISA.

[Charlottesquare]

Ms Truss confirmed she would review inheritance tax if she became Prime Minister."

Mixed feelings. I do think IHT needs to be reviewed, changed and simplified even if it is not going to be "axed" as the headline shouts.

But such changes can be a bane for anyone trying to do long-term planning such as the topic here. I have held AIM shares for this purpose for a decade now, foregoing other investment possibilities. If that provision went away that was all effectively a waste. Although I suppose it was a form of life insurance for the duration.

I would accept that loss if the overall changes led to a less punitive structure for IHT e.g. higher nil-rate band and a lower rate. And simplification should be a goal as with any type of tax. But Truss may only have 2 years to do this so I am not holding my breath.

Anyway if AIM shares were to lose their special status then their prices could fall significantly without the support of those who buy and hold them for that reason. And that would be an ugly end to the strategy.

Well Liz Truss may not become Prime Minister but even if she does I suspect that she will have a lot of rather more pressing issues to contend with before considering IHT so I doubt that it is worth worrying about.

Dod

Although she coukld screw things up she certainly looks like she will be te next PM from the polls of Conservative party members.
The policies she has announced so far though don't look like they will improve things with the EU or other problems so she might well be looking for something she could present to the electorate as a winning policy as the election is only two years away. Hence making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

Most of the electorate likely do not care much about IHT as it does not impact them, care home fees etc are probably to them far more pressing.

If the electorate were told IHT is for couples with over £1m most would likely support IHT as it would bleed the rich.

[Charlottesquare]

making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

It does not though, I think affect very many people and so is not in any sense a vote catcher, I think.

I believe that both can be true at the same time. So it is true that only a minority of estates currently pay IHT. But I have seen polls showing that a majority of voters disapprove of it.

It could be that voters worry that they will in the future be caught by it, especially with the valuations of houses in London and the South. It could also be that people have a negative gut reaction to the idea that there is a de facto tax on dying that can take up to 40% of a family's wealth. It is one of the very few taxes based on wealth rather than on transaction value.

I suspect raising the nil rate band to a million per individual would improve the situation of a good number of voters. And might stop us feeling like we have to jump through hoops to avoid it.

But it does not take 40% of their wealth as there are bands with nil charge to first be reached.

[Dod101]

making changes to something which most of the electorate doesn't like such as IHT might well appear as a good bet for boosting her popularity.

It does not though, I think affect very many people and so is not in any sense a vote catcher, I think.

I believe that both can be true at the same time. So it is true that only a minority of estates currently pay IHT. But I have seen polls showing that a majority of voters disapprove of it.

It could be that voters worry that they will in the future be caught by it, especially with the valuations of houses in London and the South. It could also be that people have a negative gut reaction to the idea that there is a de facto tax on dying that can take up to 40% of a family's wealth. It is one of the very few taxes based on wealth rather than on transaction value.

I suspect raising the nil rate band to a million per individual would improve the situation of a good number of voters. And might stop us feeling like we have to jump through hoops to avoid it.

But it does not take 40% of their wealth as there are bands with nil charge to first be reached.

It is for many estates that the marginal rate may be in the order of 40% but there are as Charlottesquare has just said many allowances so that the actual proportion of an estate lost to IHT will usually be quite a way below 40%. This has been covered before in some detail on these Boards. I am satisfied that for many people it simply is not a concern, especially at the moment with all the other problems we have.

Dod

[scrumpyjack]

Bear in mind that it is not the person who dies who bears the cost of the IHT but his/her children and heirs, and their children whose inheritance is diminished. So there can be many people interested in IHT being reduced, who would not themselves pay it currently on their own wealth. I recall the hugely positive reaction generally to Osborne's promises (never kept) and the kneejerk reaction of Labour who had to promise to ease up on IHT.

The dead don't vote but their heirs do!

[Lootman]

it does not take 40% of their wealth as there are bands with nil charge to first be reached.

True but given that I always have extant PETs that are equal to the nil rate band, the effective rate of IHT on the residue of my estate would be 40%.

Bear in mind that it is not the person who dies who bears the cost of the IHT but his/her children and heirs, and their children whose inheritance is diminished. So there can be many people interested in IHT being reduced, who would not themselves pay it currently on their own wealth. I recall the hugely positive reaction generally to Osborne's promises (never kept) and the kneejerk reaction of Labour who had to promise to ease up on IHT.

The dead don't vote but their heirs do!

Indeed. There must be millions of people whose ageing parents own properties with a value of a million or more, plus other assets of course, who are concerned that their inheritance will be (partly) confiscated by IHT.

IHT is more unpopular than one would think given how historically not a huge number of estates have paid it. And I believe that a significant part of that is an uneasy feeling that it is a tax on dying, and that it is unfair on families who have worked hard and saved hard in order to build long-term financial security and prosperity for their children and grandchildren.

[ursaminortaur]

it does not take 40% of their wealth as there are bands with nil charge to first be reached.

True but given that I always have extant PETs that are equal to the nil rate band, the effective rate of IHT on the residue of my estate would be 40%.

Bear in mind that it is not the person who dies who bears the cost of the IHT but his/her children and heirs, and their children whose inheritance is diminished. So there can be many people interested in IHT being reduced, who would not themselves pay it currently on their own wealth. I recall the hugely positive reaction generally to Osborne's promises (never kept) and the kneejerk reaction of Labour who had to promise to ease up on IHT.

The dead don't vote but their heirs do!

Indeed. There must be millions of people whose ageing parents own properties with a value of a million or more, plus other assets of course, who are concerned that their inheritance will be (partly) confiscated by IHT.

IHT is more unpopular than one would think given how historically not a huge number of estates have paid it. And I believe that a significant part of that is an uneasy feeling that it is a tax on dying, and that it is unfair on families who have worked hard and saved hard in order to build long-term financial security and prosperity for their children and grandchildren.

According to the Telegraph the number being caught by IHT is going to double in the next five years

https://www.telegraph.co.uk/tax/inheritance/number-families-paying-inheritance-tax-will-double/

The number of people paying the divisive levy will more than double compared to pre-pandemic levels in the next five years.
.
.
.
But higher than expected inflation, booming house prices and a five-year freeze in tax breaks announced at the spring Budget have forced the official forecaster to dramatically revise its expectations.

This is despite its previous forecasts already factoring in more people paying IHT because of the vast death toll caused by coronavirus.