Investing involves the risk that your capital goes down as well as up; you may get back less than you invested. The commentary below is not intended as a recommendation for you to personally buy or sell any of the investments mentioned nor to take any investment action whatsoever.
Recent press reports have suggested that both major political parties are likely to change the rules around inheritance tax (IHT). It is widely rumoured that the Conservative Government will either reduce or eliminate IHT in the March budget. At the same time, a recent report in The Times suggested that, if elected, Labour would remove some popular exemptions to IHT including potentially the smaller companies exemption and the agricultural exemption.
Therefore, it seems that regardless of who forms the next Government there is considerable downside risk to assets that target IHT mitigation. According to research by Micap (reported in CityWire), about £6.3 billion or 7.5% of the AIM market is held by IHT-focused products whilst an additional £8.8 billion is held in IHT products that hold private companies. That’s quite a large amount of investment for which the fundamental rationale may soon disappear.
Whilst it’s difficult to advise action on unannounced government policy, we think it is prudent at this stage to refrain from any new investment in such strategies. It is also, in our view, very much worth checking one's exposure to AIM investments which might come via more ordinary routes like an investment in a UK smaller companies fund (such funds often own AIM shares as part of their regular process and not for IHT purposes). This may be a good time to point out that TindleWealth explicitly rules out such funds in our client portfolios precisely because of the risk that we believe is posed to them by potential changes to the IHT rules.
So what can be done right now for future generations, regardless of any IHT changes?
Even if one takes the view that implementing anything semi-permanent, like establishing a trust, for the purposes of IHT mitigation should wait until any changes to IHT become clearer there is still plenty that families can do to tax efficiently pass on wealth to future generations.
If giving away some money is affordable then it really does make sense to ensure your intended beneficiaries are utilising the tax allowances that are available to them each and every year. This is especially true because these tax advantages must be used in the current tax year or they expire. ISAs are the most obvious examples but it is also possible to contribute to someone else’s pension (this has the added potential benefit of ensuring they cannot access it until they are, perhaps, a bit more mature and since the abolition of the Lifetime Allowance Charge the argument for doing so is more compelling).
Junior ISAs and Junior SIPPs as well as gifts from, say, grandparents to a Bare Trust for a minor are all highly tax efficient ways to transfer wealth to future generations. There are some potential drawbacks to these gifts (for example, the money is legally theirs at the age of 18 in the case of a Junior ISA) but there huge potential advantages as well (like rolling the Junior ISA into an adult ISA on their 18th birthday which could provide a healthy deposit on a flat once they are in their mid-20's).
These are but the simplest actions that can be taken. There are various more complex routes that can be explored regardless of IHT considerations including trusts that might be necessary to ensure that money is not gifting too early in a beneficiary’s life.
Please do get in contact with us if you would like to discuss these various strategies.