Tax Planning

Inheritance tax planning: Decrease inheritance tax with Goal shares

Business Property Relief (BPR) was a key survivor of Chancellor Rishi Sunak’s spring budget in early March. The tax break can be a valuable tool when planning inheritance tax, but it has been made straight to the point.

As it turned out, however, the Chancellor didn’t mention BPR, so people can keep using it, at least for now.

The basic idea of ​​BPR is that if you leave business assets to your heirs – for example a company you founded or their assets – these are to be treated differently from an inheritance tax point of view than the rest of your estate. In practice, business and inheritance tax regulations can get quite complicated, but one aspect of BPR is valuable to a potentially broad audience, including people who have never started a business in their lives.

This is because unlisted shares of a company fall within the purview of BPR. Crucially, “unlisted” has a broad definition – it includes companies listed on the Aim market, the London Stock Exchange’s junior market.

As a result, Aim stock will not count towards your estate for inheritance tax purposes in the right circumstances; These assets are therefore not taxed, even if your estate exceeds the threshold above which your heirs would normally have to pay 40% tax.

Don’t buy Aim stock just for the tax break

The first important point here is that a golden rule of financial planning is not to let “the tax tail wag the investment dog”. In other words, it never makes sense to invest solely for tax reasons. After all, target stocks have their own risks – there is little point in investing in the hope that if you lose 100% of your capital, you will save 40% in taxes.

That caveat aside, however, if you own Aim stocks as part of an investment portfolio that is carefully structured around your risk attitude and financial goals, they can be a useful way to plan inheritance tax. Target shares are usually also suitable for individual savings accounts (ISAS), where income and capital gains are also tax-free.

Just make sure you understand the rules. First, BPR has a two year qualifying period – you must have held qualifying Aim shares for two years before your death in order for the assets to be removed from your estate for inheritance tax purposes.

There’s a kink here: they don’t have to be the same Aim stocks. If you owned shares in one qualifying company for 18 months before selling it and reinvesting the proceeds in another qualifying company, the latter would receive BPR after six months.

Second, not all Aim stocks qualify for BPR. Certain sectors of the market, including financial services and real estate, typically don’t. HMRC publishes a guide on what is and what is not qualified, but you need to review each clearance to be sure or seek professional advice. About two-thirds of Aim stocks currently qualify, but the list changes constantly as companies come and go or change their activities.

How to Build an Aim Portfolio

How you use the Aim BPR tax break in practice depends on your personal circumstances and how practical you want to be. It is certainly possible to build your own portfolio of Aim stocks, but you need to be confident that you are choosing investments carefully and complying with tax regulations.

The alternative is to hire a stockbroker or financial advisor to do the work on your behalf, or to work with a company that specializes in building tax efficient investment portfolios. Companies such as Octopus, Unicorn and Wealth Club, for example, offer specialized inheritance tax portfolio services.

In any case, the usual rules for seeking professional advice apply. Only work with fully regulated companies – those authorized by the Financial Conduct Authority. And do your due diligence – check the technical qualifications of the companies, compare their fees (these can be high even by financial industry standards for this particular service) and make sure you are comfortable with them before you give up your Hand over money.

Remember, the government can change the rules at any time

In general, you should also be aware of the potential for future tax reforms that will torpedo any strategy you develop today. The fact that the Chancellor let the BPR off the hook in March does not mean that he will not change the rules in the future. With the Bureau of Tax Simplification recommending an inheritance tax reform, BPR remains a likely candidate for a revision.

One final point is that BPR is not the only inheritance tax relief for investments. The Enterprise Investment Scheme (EIS) also offers an inheritance tax benefit: investments in the EIS of up to £ 2 million per year are tax exempt after two years.

However, the EIS is an initiative to encourage early-stage investment in small businesses; The tax benefits offered reflect the increased risk profile of these companies, so you need to be prepared for potential losses.

As with aim stocks, you should never invest in companies with EIS status just for tax breaks – and once you decide the EIS is right for you, consider how to build a portfolio of qualifying companies.

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