Since Gordon Brown’s budget, many wealthy people have been running for cover, looking for ways to avoid inheritance tax. One option previous...

Since Gordon Brown’s budget, many wealthy people have been running for cover, looking for ways to avoid inheritance tax. One option previously discussed in WealthBriefing is to invest in unquoted companies, on the Alternative Investment Market. Following that theme, Norman Yarrow, director, Northern Venture Management, and a stock picker of AIM listed firms, has provided some typical examples of people faced with potentially high payments of IHT. In each example Mr Yarrow suggests how individuals might take advantage of tax relief associated with AIM investments. PEP and ISA Portfolios The first example involves a 62-year-old client with an equity portfolio of £1.5 million ($2.6 million), including ISAs and PEPs of £200,000. He is keen to reduce his IHT liability without having to give assets away to the next generation now as he may need the capital sometime in the future. He is also keen to avoid incurring any Capital Gains Tax liability on disposal of shares in his portfolio. This client should sell his ISA and PEP portfolios to realise the £200,000 free of tax, which could then be reinvested in the AIM Portfolio Service. After two years ownership, the shares would qualify for both Business Property Relief, exempting those assets from IHT, and Business Asset Taper Relief so that any CGT would be charged at the lower rate of only 10 per cent. House Downsizing In the second example, an 82-year-old widow, who is not in the best of health, has decided to sell her house and move into a nursing home. She realises £800,000 from the sale of her house and she receives £20,000 per annum from her pension and that of her deceased husband. The nursing home will cost £25,000 per annum and she requires an income of £500 per month for sundry items. She has three children and is reluctant to give money away now to her children. However, she would like to reduce her potential IHT liability. She invests £200,000 in the AIM Portfolio Service, which she would be able to finance from the sale proceeds of her house. She could then invest the balance of the sale proceeds in a portfolio of high income assets, such as gilts and commercial property, and retain a cash reserve to give her sufficient income to meet her expenses. Assuming she lives for at least two years, the AIM portfolio will be totally exempt from IHT on death. Death of Spouse A 72-year-old widow, whose husband has died recently, has two grown up children. Her husband had a portfolio of equities and gilts which was valued at £1,500,000 on death. The client is in good health and still has a reasonably long life expectancy but would like to reduce her IHT liability without giving assets away to her children. The deceased husband’s will contained a Nil Rate Band clause, which gifted his full IHT allowance of £275,000 to their children. The remaining value of the remaining portfolio would be around £1.2 million after funeral costs and, perhaps, charitable donations. The husband’s portfolio is transferred to the widow and she is able to realise £250,000 free of CGT to invest in the AIM Portfolio Service and after two years, the shares would be exempt from IHT; the potential tax saving would be £100,000. Liferent Trust In the final example, an 83-year-old, in reasonably good health, has been a widow for twelve years. On the death of her spouse a Life Rent Trust was set up whereby she received the income from the trust and the capital on her death would pass to her three children equally. The trust assets do, however, form part of her estate for IHT purposes and, accordingly, would be subject to tax at 40 per cent on her death. The capital value of the trust is £750,000 and it provides an income of £25,000 per annum, which is required to meet the cost of her day-to-day living. The trustees decide to invest £200,000 of the assets, once again in AIM companies. This maintains her income and will be exempt from IHT after two years ownership. The client survives two years and, on death, the trust’s AIM shares qualify for Business Property Relief, exempting them from IHT at 40 per cent. Assuming that this element of the trust had grown to £250,000 on her death, the trustees will have saved IHT in the sum of £100,000.