Can I invest to avoid an inheritance tax bill?
I recently inherited a modest amount of money from an elderly relative. As I am on my own, I fear that in addition to my other assets, even if they are not significant, I may end up paying inheritance tax on this small nest egg. A friend told me that I should think about investing in some type of stock that might be exempt from inheritance tax. Can you advise?
Mike Hodges, tax partner at Saffery Champness, says that although you didn’t mention any figures, it’s likely that in combination with your existing assets your recent inheritance may get you past the £325,000 zero rate inheritance tax bracket and, if you are entitled to it, the additional zero rate residence band of £175,000. Additionally, if you are married and your spouse does not use their allowances, these effectively double to a potential £1million and this applies even if they are deceased.
The freezing of thresholds – now confirmed until at least 2026 – and rising house prices mean that many other properties are at risk of tipping into tax debt. For those with existing assets who, like you, can now inherit assets, it certainly makes sense to plan ahead and there are options available for investing with inheritance tax in mind, particularly with shares on the alternative investment market (Aim).
The target is usually the market for small and medium-sized companies that have high growth potential but may be more risky than established companies in the main market. You need to make sure you’re comfortable with this before you jump in.
The appeal for many investors is that certain Aim shares can qualify for a 100% business property relief (BPR) from inheritance tax. Plus, because of the way the rules work, those shares are exempt from capital gains tax in your estate.
However, certain conditions apply for an investment to be eligible for the BPR. First, the BPR generally only applies to commercial companies. An investment would not be eligible if the business consists wholly or principally of dealing in securities, stocks or shares, land or buildings, or if the business makes or holds investments (although group holding companies are generally accepted).
Second, there is a waiting period. You must hold the shares for two years prior to death for the shares to be eligible for the BPR. Anticipation is therefore essential.
Both of these factors carry certain risks. HM Revenue & Customs does not provide a list of Aim companies whose shares are eligible and which are not. In practice, the position will not be finally determined until your executors claim relief. While in many cases the situation may be relatively clear, there will be some companies where it will be more difficult to tell from what is in the public arena that their actions are BPR eligible.
There are investment advisers who build portfolios designed to qualify for the BPR. It may be advisable to research one rather than taking on the task of choosing individual qualifying actions yourself.
Also, a note of caution. BPR was designed with the political objective of helping to prevent family businesses from being broken up to fund a large IHT bill. The value of the relief for this purpose and the support it has given to listed companies has been noted by the government. But there are questions about whether Aim’s actions are truly within the political goal of relief. Recent comments from the Office of Tax Simplification (OTS) have left these issues unresolved and reform is never ruled out.
In the meantime, the golden rule is not to let the tax tail shake the investment dog. Investing in the markets, objective or primary, always involves risk – which could eradicate any inheritance tax savings you are hoping for.
How can we fight the family dispute over the loan?
My ex-brother-in-law lives in the Netherlands and had a checkered business history. My wife and I have had no contact with him for many years, but he has now brought an action in the UK courts, claiming half the value of our London house, on the basis of a loan he consented when she and I bought the house. 25 years ago. This loan was repaid by my wife three years later from her inheritance. Unfortunately, the loan and repayment were agreed verbally and nothing was put in writing. Is this a false claim? It’s a significant property and there are several million pounds at stake.
Prateek Swaika, partner and attorney at Boies Schiller Flexner, says litigation like this can be expensive and stressful, especially because it involves family members. You must both be very anxious.
Your brother-in-law seems to believe that because of the money he loaned you, he has an equitable interest in the value of the property under a resulting or constructive trust. Which will depend on a number of factors such as how the money was paid out, to whom and how it was used.
To succeed, he would have to prove a mutual intention for him to share the beneficial interest in the property. You will have to prove that there was no such common intention and that the money paid was simply a loan, which has long since been repaid in full.
The surrounding documentary and factual evidence will be decisive for the case even if you note that the loan and repayment were verbally agreed. The challenge of verbal agreements is to prove the substance of the conversation and the specific date and time it took place.
You should check to see if records documenting incoming and outgoing payments are available from your bank, which would help prove that the money was a loan and has been repaid.
Statements from you and your wife setting out what was discussed with your brother-in-law would also be helpful, as would other contemporaneous evidence such as letters or notes to third parties referring to the loan and the agreement and statements from friends or family members with whom you may have discussed the verbal agreement or loan at the time.
You should also review the evidence he relies on in his pre-action correspondence and claim to establish common intent. He is required by the rules of the court to explain the basis on which his claim is made, provide a summary of the facts and how the amount he is asking you is calculated. The court may sanction him or suspend the request until he does so.
If you and your wife live in England, your brother-in-law can sue you in English court. It is irrelevant for the purposes of the jurisdiction of the English court over this claim that he is based in the Netherlands.
However, since the dispute relates to a payment made several years ago, the court may not have jurisdiction to rule on the claim because it is time-barred. This will depend on further analysis of the facts. In the absence of fraud, the action of a beneficiary to recover the assets of the trust is prescribed by six years from the birth of the claim. This is presumably the date you first denied his claim to a share of the property.
Given the complexity of the issues, you should seek legal advice, ideally before completing the court form in which you formally acknowledge the service of the proceeding, so that you can consider resisting the jurisdiction of the English court to adjudicate on this request. You should also review your home insurance policy to see if it includes legal expense coverage.
The reviews in this column are intended for general informational purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect results arising from any reliance placed on the answers, including any losses, and exclude all liability to the fullest extent.
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