Inheritance Tax (IHT) has long been considered Britain's ‘most-hated’ tax. IHT is hugely unpopular as it is viewed as a tax on assets that have already been taxed during a person's lifetime. IHT also creates a tax liability at a difficult time for grieving families and there is only a six-month window to establish probate and pay HMRC before interest at 7.5%¹ is charged on assets, such as the family home, which can be illiquid. Furthermore, the rate of interest on the late payment surcharge is due to increase to 4% plus the Bank of England base rate, with effect from 6 April 20253. Little wonder IHT is loathed.

IHT receipts raised £7.5 billion2 in 2023-24 and are expected to reach £13.9 billion2 in 2029/30, with key policy changes announced in the Autumn Budget bolstering receipts by £2.5 billion2. The key changes are highlighted below:

• From April 2026, a new £1 million limit will apply to the combined value of agricultural and business property that gains 100% IHT exemption and above this allowance the rate of relief will be 50%. A flat rate of 50% business relief will apply to AIM shares.
• The government is removing the opportunity for individuals to use pensions as a vehicle for IHT planning by bringing defined contribution pension and lump sum death benefits from defined benefit schemes into the scope of IHT from April 2027.
• The current IHT tax thresholds are due to be frozen until April 2028, and the government is extending this date to April 2030. For reference, the nil rate IHT band has not increased since 2008/09 and according to the Land Registry, average house prices in England have increased from less than £160,000 in April 2009, to over £300,000 today.

These changes will lead to the proportion of deaths subject to IHT almost doubling from 5.2% in 2023/24 to 9.5%² (or approximately 60,000 estates) in 2029/30, while the average tax bill is expected to remain roughly constant at c.£300,000.

Fortunately, there are a range of tax planning options which could be used to minimise IHT. We would expect to see greater use of gifts so that after 7 years they qualify for a Potentially Exempt Transfer (PET) and, where possible, gifting surplus income. In addition, clients may consider taking the tax-free lump sum from their defined contribution pension and use this for outright gifts and move into drawdown to maximise income. The tax-free lump sum may also be used to invest in business relief.

There is an expectation that clients will generally seek to make greater use of business relief (BR) as it provides 100% or 50% exemption from IHT after a two-year holding period (providing the assets are held on the date of death), whilst also enabling an individual to retain control and flexibility to realise the assets if their financial circumstances change.

There are two types of BR scheme – AIM and Generalist. We consider both schemes ‘high’ risk as they are invested in an illiquid and potentially volatile asset class. It is important to understand the risks as Generalist BR schemes are often marketed as ‘lower’ risk.

AIM BR portfolios have the key advantage of being ISA eligible and offer a greater (uncapped) opportunity for capital appreciation, with investment returns linked to the wider UK equity market. AIM portfolios also offer the ability to invest in companies listed on a regulated market, providing transparency, liquidity and pricing determined on an arms-length basis. However, on the downside, there is short-term volatility as the underlying holdings are marked-to-market on a daily basis.

Generalist BR overcomes the short-term pricing volatility by investing in operating assets (such as social housing, care homes, solar and wind generation) and lending activities (in the form of leasing or property backed bridging loans). Whilst these activities are designed to provide stable and predictable returns, typically targeting 3-4% pa capital growth; there is the danger that clients fail to fully appreciate the risks and inherent difficulty valuing unlisted assets. Generalist BR also suffers from a lack of transparency and there is a potential conflict of interest in how the assets are valued, as typically the management fee is only paid if the target return is achieved. Finally, liquidity with Generalist BR is limited to the investment manager providing a matched bargain, which may become difficult if outflows outweigh inflows. This would pose a serious issue if the government changed the BR rules for generalist managers.

We believe BR portfolios have an increasingly important role to play as an IHT planning strategy. Whilst AIM has the advantage of being ISA eligible, from April 2026, only 50% BR is available. As a result, Generalist BR schemes may be more suitable than AIM for clients with a short time horizon. However, we would encourage advisers to combine both AIM and Generalist BR schemes to increase the level of diversification and liquidity. Moreover, for clients that are starting IHT planning at an earlier stage or who have an ISA, there is also an argument for favouring AIM given the potential for greater investment returns. A resilient economy, political stability and reduced inflation should provide a positive background for equities. In this environment, AIM companies should do well given their sensitivity to the domestic economy and to interest rates combined with their attractive valuations.

Source:
¹ HMRC: Inheritance Tax thresholds and interest rates, 5 August 2024
² Office for Budget Responsibility: Economic and fiscal outlook, October 2024
³ HM Treasury: Autumn Budget 2024

Disclaimer
This document has been prepared by Whitman Asset Management Limited (“Whitman”). This document is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This document has no regard for the specific investment objectives, financial situation or needs or any specific investor. Although Whitman uses all reasonable skill and care in compiling this report and considers the information to be reliable, no warranty is given as to its accuracy or completeness. The opinions expressed accurately reflect the views of Whitman at the date of this document and, whilst the opinions stated are honestly held, they are not guarantees and should not be relied upon. Our opinions reflect our views at such time regarding market conditions and other factors, may depend upon assumptions or projections that may not prove to be correct, and are subject to change.
 
 
GENERAL RISK WARNING An AIM Portfolio should be regarded as a higher risk, long-term investment, suitable only for investors with financial security that is independent to any investment being made in the Whitman AIM Portfolio. The tax treatment depends on the financial circumstances of each client. We strongly recommend that you seek independent professional financial and tax advice before you ask us to manage your AIM Portfolio for you. The investments that will be held in the AIM Portfolio are likely to be smaller UK companies which may qualify for the business relief after two years (“Qualifying Investments”) in accordance with Tax Regulations . Such investments will inevitably involve higher risk and may be difficult or even impossible to realise in a reasonable timescale or at an acceptable price. This product is classified as high risk and should form part of a diversified portfolio. If investors are unsure about whether the product is suitable for their circumstances they should seek independent professional financial and tax advice prior to making an investment.

 
PAST PERFORMANCE WARNING Past performance is no guide to future performance and there is no guarantee that the AIM Portfolio’s objective will be achieved. We can make no guarantee of investment performance or the level of capital gains or income that will be generated by the AIM Portfolio. The value of Qualifying Investments and the income derived from them may go down as well as up and you may not get back the full amount invested.

LIQUIDITY RISK WARNING Please note that Qualifying Investments can carry a higher degree of risk than investing in more liquid shares of larger companies. The share prices of AIM investments are generally more volatile than shares listed on the London Stock Exchange main market. There may be a wide spread between buying and selling prices for AIM listed shares. If you have to sell these shares immediately you may not get back the full amount invested, due to the wide spread. The value of your investments may decline and there is a risk that this may outweigh any IHT saving. You should be aware that the Qualifying Investments in your AIM Portfolio may be classified under FCA Rules as ‘not readily realisable’ (these are investments in which the market is limited or could become so and they can be difficult to deal in or obtain reliable information about their value).
 
TAX LEGISLATION WARNING Rates of tax, tax benefits and allowances are based on current legislation and HMRC practice. These may change from time to time and are not guaranteed. Current tax rules and the available tax reliefs offered on investments into AIM-quoted stocks may change at any time, and there is a considerable risk that if the legislation changed in respect of these tax reliefs, then those portfolio companies that no longer qualified for such reliefs would be subject to heavy selling pressure, potentially leading to significant investment losses. This investment may not be suitable for all investors. You are recommended to seek specialist independent tax and financial advice before deciding to subscribe to this AIM Service. This AIM Service has been designed with UK-resident taxpayers in mind. If you are not resident or ordinarily resident in the UK for tax purposes, it may not be appropriate or advantageous for you to subscribe to this AIM Service.
 
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