Inheritance Tax exemptions

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17th Mar '17 by John

21 comments 11648 reads

My understanding is that holdings in "SOME" AIM companies are exempt from IHT, but was advised to contact the individual companies to find out what their status was in this respect.
I started by phoning the NOMAD of Empresaria as I have a large holding of these in my ISA.
I was told that this was classed as "insider information". This must surely be nonsense! It strikes me that EMR's NOMAD is doing their client no favours in reacting in this way.
Anyone else had experience of this problem and is there a definitive list anywhere of exempt companies?
Joe

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John

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21 comments

John

17th Mar '17

Thanks, Herbie, that is certainly a useful start.
It would be good to make up a list of current qualifiers for exemption which could be kept up to date!
J

Rusty2

17th Mar '17

I read you should contact the company directly, you are correct not all Aim shares qualify and there does not seem to be any list of which ones currently are exempt. Note that the status can change.

John

17th Mar '17

Yes, I realise that a list would be a bit of a moving target, especially when governments can change their minds so easily. I'll keep trying to establish some kind of list which could be updated anyway!
Still can't believe the NOMAD's attitude.

alterego

17th Mar '17

It maybe worthwhile looking at http://www.investorschampion.com/aim-for-iht . I have built a portfolio designed to give IHT exemption by trying to follow the basic rules associated with Business Property Relief. The shares should not be listed on a recognised exchange (HMRC define this with a list of recognised exchanges) AIM is not listed. The company should be a genuine trading company, not one that simply derives income from investment or letting property for example. Making and selling widgets would appear to be valid trading.
Even where the company fulfils these requirements there are potential snags. For example assets held by the company which are not needed for its trading activity may be excluded for BPR purposes. See http://www.rossmartin.co.uk/private-client-a-estate-planning/inheritance-tax-probate/619-business-property-relief-iht
In the end it is only HMRC that can confirm the exemption and they chose only to do so, when a claim for relief is made on the death of the holder. A good tax adviser may be able to steer you in the right direction and there are investment companies that will build you a portfolio if you can stomach their fees.

John

17th Mar '17

Thanks Alterego - these are excellent links!
Joe

gus 1065

18th Mar '17

Found this commentary while trawling through the Burford Capital (LON:BUR) website FAQs. Sums up the general as well as specific situation as it relates to Burford Capital.

"DO THE SHARES OF BURFORD CAPITAL QUALIFY FOR UK BUSINESS PROPERTY RELIEF?

We are regularly asked by UK investors whether Burford’s shares qualify for UK Business Property Relief (“BPR”) for inheritance tax purposes. Burford cannot of course provide you with tax or other financial planning advice, and you should consult your own advisors rather than rely on what is stated here, but we provide the below comments in an effort to assist you in your own analysis.

We are not aware of any case where Her Majesty’s Revenue & Customs (HMRC) has rejected Burford’s shares as qualifying for BPR.

That is not, however, a complete answer. AIM shares like Burford’s are eligible for consideration for BPR. Unfortunately, the manner in which HMRC determines an ultimate position appears to be on a case-by-case basis. In other words, as part of the process for executing the will or administering the estate of a person who has died, a local HMRC agent will make his or her own individual assessment, which may or may not be consistent with an assessment made by another agent. There appears to be no HMRC master list of AIM-listed companies whose shares are eligible for BPR and there is no mechanism for obtaining an advance ruling.

In our view, it is not possible for any company to provide investors with an assurance that their shares will qualify for BPR."

Like many things Burford related, seems pretty clear, thought through and well presented! An example to others.

Best,

Gus.

gordon345

18th Mar '17

I looked into this recently and would echo all the comments above.

I think it is investorschampion who have a tool to allow you to check if a company qualifies for BPR, for which you are charged to use.
More importantly than the charges of course, because companies circumstances can change, is how often do investorschampion check this and how often do you pay to use the tool.

My conclusion was that the only person who will know for certain are my executors when the time comes to check with HMRC.

For what it is worth, among the reading I did, it was suggested that Zytronic, Abcam, Burford Capital, and FW Thorpe would qualify at present. No links to the articles.

Gordon

alterego

19th Mar '17

Although I do hold BUR, I have regarded the shares as less likely to qualify for BPR than others for the simple reason that BUR is essentially a company that invests money in situations it believes will earn a good return. Unlike the makers of "widgets" I mentioned above, BUR produces no product and the main service it supplies is the provision of finance. I may be wrong and HMRC may regard it as a genuine trading company but there are many others where I think the risk of rejection on a BRP claim are much lower. Examples I believe would qualify include WGB, JHD, LTHM, BREE, RWS, ABDP, EPWN, FLO, PRSM, SDM, SND, VTU, WJG all of which sell goods or provide services which IMO ought to prove they are a trading company (as opposed to an investment vehicle).

John

19th Mar '17

I think the following might also qualify - ANCR, BVXP, BJU, CAML, EMR, GAMA, IQE, RWS, SOM, SPE, XLM, ZYT,
Shall be happy to hear, contrary opinions/additional candidates.

garbetklb

19th Mar '17

I run a substantial portfolio of AIM shares for my mother with the intention of avoiding IHT via the BPR exemption. A few points / thoughts, which I BELIEVE to be correct :
- As has already been said, HMRC will not comment in advance of probate.
- Most AIM companies will not give an opinion
- What becomes exempt is the holding in the company - ie the value at the time of death, regardless of the amount invested. And remember that CGT disappears at death, to be replaced by IHT - which the holding will (hopefully) be exempt from.
- The investment gains exemption after 2 years - but it does not have to be in the same company. ie one could buy JHD, sell after 12 months and reinvest the proceeds in ZYT. 12 months later, ie 2 years from the initial investment, the current holding in ZYT becomes exempt from IHT.
- I believe the exemption answer will frequently be neither yes or no. Many companies might have some asset excluded, but the majority of the business included. A few areas that MIGHT result in <100% exemption - a company holding excess cash, retaining a redundant property & renting it out, holding an investment in a joint venture other than for trading purposes.
- Takovers can be very dangerous - if the acquiring company is not IHR compliant, accepting shares (evenif immediately sold) or maybe even cash, can lose the IHT exemption built up for the acquired company. It may be better to sell in advance & redeploy funds.
- Reinvested dividends are not IHT exempt - regarded as new investments and a 2 year qualification period will apply.
- Keep good records. And remember that your executor may have to demonstrate what % of a purchase comes from reinvestment of a sold & qualifying investment and what % from new funds / dividends. It could be complicated!
- A dual listing with an overseas exchange normally, but not always, results in disqualification from exemption.
- Domicile of the AIM listed company is irrelevant - so overseas companies like SOM,XLM etc qualify just as much as UK stalwarts. Personally, I mainly stick to UK companies.
- I find the Investors Champion service to be pretty helpful and not too expensive.
- The above applies to shares in the companies - I've no idea about thinks like preference shares. And I doubt that interests held via spread bets etc would give exemption - but would appreciate comments from others!

Garbetklb

John

20th Mar '17

Excellent reply, Garbetklb,
Was particularly interested in the following paragraph:-

"The investment gains exemption after 2 years - but it does not have to be in the same company. ie one could buy JHD, sell after 12 months and reinvest the proceeds in ZYT. 12 months later, ie 2 years from the initial investment, the current holding in ZYT becomes exempt from IHT."

In this case keeping good records will be extremely important!
Joe

garbetklb

20th Mar '17

Hi Joe
As I also mentioned, record keeping becomes more complicated if, when doing the reinvestment at 12m, you include some dividend income that's accumulated in the account........
Andy

John

23rd Mar '17

"The investment gains exemption after 2 years - but it does not have to be in the same company. ie one could buy JHD, sell after 12 months and reinvest the proceeds in ZYT. 12 months later, ie 2 years from the initial investment, the current holding in ZYT becomes exempt from IHT."

How long after selling JHD could one re-invest in ZYT? In other words would you have to reinvest right away?

alterego

23rd Mar '17

Found this useful guide to what will not qualify for IHT relief at https://www.taxinsider.co.uk/687-Investments_as_BPR_Vehicles_for_IHT_Savings.html

No BPR is available in the following circumstances:

• The business consists wholly or mainly of dealing in stocks and shares (except market makers and discount houses);

• The business is wholly or mainly dealing in land or buildings;

• The business is wholly or mainly holding investments (which includes land which is let);

• Where there is a ‘buy and sell’ agreement on death, or the property is subject to a binding contract for sale (however a ‘double option’ agreement will not exclude BPR);

• a family owned investment company whose principle 'business' is investing in residential or commercial property, stocks, shares, or securities;

• AIM listed companies that are investment companies.

The company invested in must carry on a trade, and investment companies will not qualify.

tiswas

4th Sep '17

I have just started looking at this a little more seriously having originally thought that it just applied to qualifying AIM shares held for more than 2 years at the time of death.

I also found this at https://www.share.com/blog/2014/may/guide-qualifying-aim-companies-inheritance-tax-planning/

Many investors considering investing in AIM for IHT planning purposes are under the impression that it is necessary to hold the same shares for the entire 2 year period. This is not the case and relief is not necessarily lost if the investor disposes of qualifying shares and replaces them with other qualifying shares. However, in order to still qualify for relief the whole of the sale proceeds must have been used to purchase the replacement shares. HMRC is very generous in the time it allows for reinvestment with the both the sale and purchase only having to take place within three years of each other.

I have a decent sized ISA but am a fairly active trader and see this as quite a logistical nightmare to document in terms of going back x number of years and proving how individual investments have been subsequently rolled over up to three years later. Anyone have any experience of this?
Thanks.

timarr

7th Oct '17

I was reading John Lee's column in the FT this morning and he's flagged the political risk around the IHT relief on AIM stocks:

My point on the former is that many Aim holdings in portfolios like mine are standing at their current historically high levels, in part because of existing taxation relief. Any change or withdrawal could result in very sharp share price corrections.

https://www.ft.com/content/213...

timarr

Logic

7th Oct '17

Another concern with AIM may be the relatively higher volatility. The combination of volatile, historically high valuations (as per quote by timarr), and numerous potential future risks (numerous political risks, QE cessation/interest rate increase, etc) is worrisome. I hope everyone who invests for IHT purposes make sure that they have a diversified portfolio, one that will weather a recession reasonably, and/or instructions to descendents what to do with it (even something as simple as "sell it all" or "follow these mechanical rules if I die during a recession"). Having said that, I do believe that someone recently posted that AIM is not so much at an incredible high as merely having finally recovered from the last crisis (may have been in the threat reviewing screens and what worked in which market in the last quarter).

I know this suggestion is simply not going to be viable for most, and while it is about inheritance tax it is not about AIM shares. I do not wish to derail the discussion on AIM and IHT, but thought I should mention it.
If the intention is to minimise IHT paid to HMRC, one could relocate out of HMRCs grasp.
If English must be a primary language; Canada and Australia have 0% IHT.
If you like sunshine, you could consider Greece (20%), Turkey (10%), Italy (4%), Portugal or Israel (0%).
If you like Scandinavia, Norway and Sweden charge 0%. If you are terrified of political risk and want a neutral country, love gold, watches and chocolate, Switzerland offers 7%.

As I understand, IHT is levied on the estate of the person who has passed away, not on the person inheriting. I believe one has to have moved some number of years before passing away, for HMRC to stay completely clear.

Of course, all those percentages I gave are from a quick google search, you would have to clarify all of this with HMRC and respective tax authorities in other countries before making a move (or a financial planner of some form), and also have to take things into consideration such as whether you would want to live anywhere else, living costs, healthcare provisions, costs involved in a move/visiting children and friends, other taxes, etc.

Just throwing it out there..

peterg

7th Oct '17

All of these seem like a lot of effort to deal with a problem none of us will ever have to deal with. My son has had a lot of financial support in my life, and will receive more on my death. I have no problem with some of my estate going to the state that has supported me, and my children all their lives, and I will not be distorting my life choices or investment choices to try and avoid it. If I reach the end of my life having failed to recycle a significant proportion of my wealth into the economy then it seems perfectly reasonable to me that the state should take a portion of it to support that economy via infrastructure, health, defence, education etc.

Peter

Logic

7th Oct '17

Some will wish to reduce IHT through AIM shares, others will use ISA accounts to reduce tax on CG and dividends. As long as people select from legally available options, I have no issue with whether they opt to pay more or less in taxes.

While not passing judgment on anyone for wishing to pay less, I find it noble of you Peter to intend to contribute so generously.

John

7th Oct '17

"However, in order to still qualify for relief the whole of the sale proceeds must have been used to purchase the replacement shares."
So if I sell company A for £10,000 in January and buy shares in company B for £15,000 in August would this mean that £10,000 of my investment in company B would qualify back to the date when company A was purchased since I have used the "whole of the sale proceeds" for the new purchase?

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John

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