Inheritance Tax Planning
How is Inheritance Tax Saving Achieved?
Under current tax rules unlimited exemption from IHT is available to private individuals, provided that an investor has held shares in a qualifying company for at least two years. Most companies trading on AIM, with the exception of many overseas companies and those principally engaged in property or investment activities, are qualifying companies which are eligible for Business Property Relief. As such, the shares are classed as business assets attracting favourable tax breaks. However, potential investors should be aware that tax rules are subject to change.
Unlike other solutions, you retain access to your investments at all times. If your circumstances change and you want to make additional contributions you can. You can also withdraw all or part of your portfolio at any time but the IHT exemption is only available if the relevant shares are held at the date of death and the RSITP should therefore be seen as a medium to long term investment.
Example of possible savings
An individual has an estate which includes an equity portfolio worth £600,000 and invests £100,000 in AIM shares via the RSITP. Assuming the IHT nil rate band is utilised against other assets, such as the family home, the estate will benefit after two years by investing in the RSITP even if there is no growth in the value of the portfolio as follows:
| With RITP | Without RITP | |
|---|---|---|
| Value of equity portfolio | £500,000 | £600,000 |
| Value of AIM portfolio | £100,000 | - |
| Less: IHT @ 40% initial costs | (£200,000) (£2,000) |
(£240,000) |
| Net value of portfolio | £398,000 | £360,000 |
In this example the RSITP would have increased the value of the Estate by £38,000, representing 10.6% of the net value of the portfolio, as the AIM shares, valued at £100,000, are excluded from the IHT liability.
However the rate of IHT, the amount of the nil rate band and the available exemptions could change and the value of the IHT saving depends on the circumstances of the investor. You should take advice from your accountant or other tax adviser about your personal tax situation.
How long must I hold my investment?
The IHT exemption is available after the AIM shares have been held for two years but is only available on shares held at the date of death, so the shares must be retained until death to achieve the IHT benefit. Because the value of shares can fall as well as rise, the RSITP should be viewed as a medium to long term investment to be held for at least five years. On death the portfolio can either be sold or transferred to a spouse without the loss of the IHT exemption.
The risks
The RSITP should be regarded as a higher risk, longterm investment. AIM company shares tend to be relatively illiquid and therefore may be difficult to sell or obtain reliable information as to the value and the risks to which the shares are exposed.
You should only invest in the RSITP if you have financial security independent of any investment made. The value of shares purchased and any income derived may go down as well as up and investors may not get back the full amount invested. Past performance is not a guide to the future. Potential investors should be aware that tax rules are subject to change.
In order to ensure that the RSITP is suitable for you, you must take advice from an Independent Financial Adviser or from any Rensburg Sheppards office (see page 15 for details).
The Alternative Investment Market
AIM was launched by the London Stock Exchange in 1995 specifically to meet the needs of smaller, growing companies, giving them access to equity capital and a share trading facility. Since then £57 billion has been raised to 31 March 2008 and at that date there were 1,338 UK companies on AIM, across a diverse range of sectors ranging from leading-edge technology to distribution, restaurants and leisure. At 31 March 2008, the companies trading on AIM had a total market capitalisation of £89 billion with an average market capitalisation of £53 million. Because AIM comprises of smaller companies, it is generally viewed as higher risk than fully listed shares on the London Stock Exchange.
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