Inheritance Tax-Friendly Investments

24 August 2023

Jan Friend

Reducing Tax, Estate Planning / IHT

Inheritance tax (IHT) is a concern for many individuals and families as it can significantly reduce the wealth passed on to future generations.

However, with careful planning and strategic investment choices, it is possible to mitigate the impact of IHT on your estate.

What investments are Inheritance Tax Friendly?

In this blog, we will explore some inheritance tax-friendly investments that can help you protect and maximise your wealth for the benefit of your loved ones.

Business Property Relief (BPR)-Qualifying Investments

BPR is a valuable tax relief which can encourage investment in certain types of businesses.

Investments in BPR-qualifying companies, including unlisted shares and unquoted shares on the Alternative Investment Market (AIM), can be eligible for 100% relief from IHT after being held for at least two years.

This also includes shares in your own trading company.

BPR-qualifying investments can be a viable option for individuals seeking to reduce their IHT liability while supporting promising businesses.

AIM Listed ISAs

The Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange, specifically designed for smaller, growing companies.

AIM Listed ISAs provide an opportunity for investors to hold shares in qualifying AIM-listed companies within a tax-efficient wrapper.

Benefits of AIM Listed ISAs:

a) Inheritance Tax Relief: Shares held within an AIM Listed ISA are considered “business property” for inheritance tax purposes. This means that after two years of being held in an ISA, the shares become exempt from IHT, provided they are still held at the time of death.

b) Capital Gains Tax (CGT) Benefits: Any gains made on the sale of shares held within an AIM Listed ISA are exempt from CGT. This allows investors to benefit from tax-efficient growth and potentially maximise their returns.

c) Investment Opportunities: AIM Listed ISAs provide access to a range of growth-oriented companies, often in sectors such as technology, healthcare, and renewable energy. Investing in these sectors can potentially offer attractive returns over the long term.

Discounted Gift Trusts

Discounted Gift Trusts (DGTs) are a popular estate planning tool used to mitigate IHT.

They involve gifting assets, usually cash, into a trust while retaining the right to receive a regular income from the trust for a specific period or until death.

Benefits of Discounted Gift Trusts:

a) IHT Efficiency: By gifting assets into a DGT, the value of the gift is immediately removed from the individual’s estate for IHT purposes. However, they still retain an income from the trust, which can help meet ongoing financial needs.

b) Potential Income Generation: The income received from the trust can be structured in a way that suits the individual’s needs, providing a regular income stream during their lifetime.

c) Gifting Flexibility: DGTs offer flexibility in terms of the choice of beneficiaries and the amount gifted. This can be particularly beneficial for individuals who want to ensure their wealth is passed on to their loved ones while minimising the impact of IHT.

Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme is designed to encourage investment in smaller, higher-risk trading companies.

By investing in EIS-qualifying companies, individuals can benefit from income tax relief of up to 30% of the amount invested and, in some cases, capital gains tax (CGT) deferral.

After being held for at least two years, EIS investments may also qualify for relief from IHT, providing an opportunity to grow your wealth and potentially reduce your IHT liability simultaneously.

Venture Capital Trusts (VCTs)

VCTs are investment trusts that provide capital to small, high-risk companies in exchange for shares.

Investing in VCTs can offer income tax relief of up to 30% on the amount invested, tax-free dividends, and potential exemption from CGT.

Moreover, after holding VCT shares for at least two years, they become IHT-free, making them an attractive option for those looking to invest in small businesses while mitigating their IHT liability.

Agricultural Property Relief (APR)

For individuals with significant agricultural assets, such as farmland or woodland, Agricultural Property Relief can be a valuable tool for minimising IHT.

APR provides relief at either 100% or 50% on the agricultural value of qualifying assets, depending on the circumstances.

By utilising APR, it is possible to pass on agricultural assets to the next generation without triggering IHT, preserving the wealth tied to such properties.

Pension

Investing in defined contribution pensions is also a great way to pass wealth on to your family.

As well as potentially providing income for your retirement it has the added advantage that once funds have transferred into your pension they are immediately free of inheritance tax.

There are restrictions on how much you can pay into your pension so please seek professional advice before setting up a pension.

Are Inheritance Tax-Friendly investments for me?

Inheritance tax can substantially impact the wealth passed down to your heirs, but through prudent investment choices and strategic planning, it is possible to mitigate its effects.

Utilising inheritance tax-friendly investments such as BPR-qualifying investments, EIS, VCTs, pensions and APR can help protect and maximise your wealth for future generations.

However, it is crucial to remember that everyone’s financial situation is unique and seeking professional advice from a qualified financial advisor or tax specialist is essential to ensure these investment strategies align with your specific goals and circumstances.

Contacting us

If you are interested in finding out how we can help you reduce inheritance tax on your estate or that of a family member contact Jan Friend by email or on 01634 731390.