The first rule of Inheritance Tax (IHT) planning is to give away as much

as you can, as soon as you can. But if your elderly relations have left it

a bit late in the day, is there anything that can be done?

 

Human nature

 

IHT is usually low on people’s agenda when it comes to tax planning,

but leaving it to the eleventh hour is the worst possible way to approach

it. Yet that’s exactly what the majority of folk do. So, if you’ve got

elderly relations that find themselves in this position, what advice can

you offer?

 

Seven-year problem

 

You’ve probably heard that if you give an asset away within seven years of death, the Taxman will treat it as part of your estate for IHT purposes. So, what, for example, should you do if Mum’s health takes a turn for the worse? IHT may not be a subject you want to discuss but the alternative could mean handing over a big chunk of her estate (and your inheritance) to the Taxman. So it’s far better to bite the bullet. If you suspect she doesn’t have seven years left what can you say?

 

Take AIM

 

If your mum has substantial free assets, by that we mean that the money is held in bank deposits or stocks and shares etc, there’s a neat re-investment strategy.

 

Tip

 

Most of the companies quoted on the Alternative Investment Market (AIM) carry on a trading business that qualifies their shareholders for IHT business property relief (BPR). If you buy shares in one or more of these, the value of your investment will get 100% relief from IHT provided you own them for at least two years. Unless you’re familiar with the AIM market, you’ll probably want to ask a broker to give you advice on the type of company to invest in.

 

Timing

 

There could be a Capital Gains Tax (CGT) problem if your relation needs to sell existing shares to fund the AIM purchases. But now might be a goodtime to think of switching investments from traditional stocks to those quoted on AIM. Values of many shares are still down and so any gains will be low. However, if a gain can’t be avoided, there’s a tailor-made solution.

  

Tip

 

A CGT holdover election can be made to defer tax on any capital gain where the funds are re-invested into an unquoted trading company. This includes AIM companies. The gains are deferred until the AIM shares are sold or the owner dies, in which case the gain is wiped out and escapes completely tax-free! And of course BPR means there’s no IHT either.

 

Your own AIM

 

Tip

 

Before you race off to the AIM try looking closer to home first. Do you or other members of the family own an unquoted trading company? There’s no reason why your relation can’t invest by buying shares in your company. You could create a different class of ordinary share just for them so that you can pay dividends selectively if they need the income.

 

Trap

 

You can’t keep the money invested sitting around in the bank. If there’s too much cash doing nothing in the company, the Taxman can argue a proportionate reduction of BPR.