For clients who have decided not to make outright gifts during their lifetime and/or where life assurance is not appropriate, investing tax efficiently allows them to keep control of their money while achieving an IHT saving over time. Typically this is achieved by investing in assets that qualify for business property relief (BPR), which reduces the value of the asset when calculating how much IHT has to be paid.
Investing in a portfolio of Alternative Investment Market (Aim) shares is a good example. Certain Aim shares qualify for BPR and once the client has held these shares for two years they qualify for 100 per cent BPR, meaning a zero value for IHT purposes. The client still owns the Aim shares and, unlike an outright gift, can access the capital if the unexpected happens.
However, Aim shares are higher risk, volatile securities. In the worst-case scenario, a client could lose 100 per cent of an Aim investment. Care must be taken to ensure clients have the risk tolerance and capacity for loss to make this kind of investment. A balanced investor, however you define this, should remain a balanced investor, even after an investment into Aim.
On death, Aim investment also offers spouses and civil partners the opportunity for a second bite at the cherry. For example, a husband leaves his Aim shares (that he has held for two years) into a discretionary trust on death; the shares pass into the trust without an IHT charge. His widow buys the shares from the trust with cash, thus gaining an asset that immediately has a zero value for IHT purposes, assuming she still holds it at her death, and removes the equivalent amount of cash from her estate, which would otherwise be subject to IHT.
Many of the concerns about Aim are similar with Enterprise Investment Schemes (EIS). These schemes offer a broad range of tax incentives and are perhaps better known for the opportunity to defer capital gains tax or mitigate income tax. From an IHT perspective, EIS shares ordinarily qualify for BPR after two years, giving a zero value if still held on death.
EIS shares are high-risk investments – although there are varying degrees of risk across individual schemes – and are unlikely to be suitable for cautious clients without a broad asset base. The liquidity, or illiquidity, of an EIS should always be kept in mind. Beneficiaries wanting to access their inheritance may be frustrated by the inability to sell EIS shares quickly or without applying a discount. (This is unhelpful to an adviser hoping to build a relationship with the next generation). To my mind, if the driving objective is mitigating IHT, there are likely to be more suitable options.
