Inheritance Tax is often called a voluntary tax, paid only by the wealthy who fail to plan properly. You won’t find many people that like the idea of paying 40% tax on their life savings, and with more individuals seeking professional financial advice in recent years,1 it’s no wonder that certain tax planning strategies are proving very popular. There is one such strategy that may be creating a hidden risk within your portfolio, even if you’re wondering what the hell I’m on about.

What is Business Property Relief?

Business Property Relief (BPR) has been on the go since 1976. It was designed to allow small, family-owned businesses to be passed from one generation to the next, without the tax man getting in the way by charging Inheritance Tax.

From allowing the local butcher’s shop to be passed on within the family, the BPR exemption now applies to quite a wide definition of ‘unlisted shares’. This includes most companies traded on AIM. Behemoths such as Fevertree and Abcam now benefit from this very same tax break. And there’s a whole host of investment management firms taking advantage of that fact.

BPR’s Inheritance Tax Attractions

The flow of money into AIM Inheritance Tax (IHT) Portfolios has been considerable. This article from the FT cites the surge in popularity of these products as of two years ago. From my own experience, I know many IFAs used to classify AIM Portfolios in the ‘niche’ or ‘esoteric’ bucket, but have been increasingly comfortable recommending such portfolios for the past three or four years at least.

You need to hold the qualifying investment for two years before it becomes exempt from Inheritance Tax. Any cash balances would remain subject to Inheritance Tax, however individual stocks may be sold and relief will continue once the proceeds are reinvested.

There are other Inheritance Tax planning strategies, but most of these involve gifting and trusts, or simply covering the tax bill with expensive life insurance. An AIM portfolio has the advantage of retaining assets in the client’s own name. Being effective after two years is also a shorter timescale than the simplest gifting and trust solutions, which can take seven or even fourteen years to completely fall out of the taxable estate. AIM is now a fundamental element of Inheritance Tax planning.

Coming Under Fire

However, the…

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