Enhanced investment growth, substantial tax savings and supporting UK business growth

Business Relief fuels superior investment returns

According to the Office for Budget Responsibility’s ‘Economic and Fiscal Outlook’ report released in March 2019, the Government is forecast to collect £6.3billion from inheritance tax by the 2023-24 tax year.

This is a £1billion increase from the last tax year ending 5 April 2019, when HMRC collected £5.3billion from inheritance tax.

To put things in plainer language, analysis by insurer NFU Mutual determined that the average inheritance tax bill reached almost £200,000 in the last tax year, up £60,000 in five years. HMRC statistics also revealed that around 5,000 individuals paid Inheritance Tax last year while they were still alive, due “in many cases” to gifts into certain types of trust, which can trigger an Inheritance Tax bill.

– Scandalous to pay tax on assets which have already been taxed!

These are big amounts being paid by estates on money that has already been subjected to prior taxes. Trusts also complicate things further, adding another layer of fees, largely for the benefit of lawyers.

– Super rich pay less Inheritance Tax

According to research undertaken by Canada Life, the UK’s super-rich are paying just half the effective Inheritance Tax rate of many smaller estates.

The data from HMRC Inheritance Tax forms for the 2015/16 tax year showed that estates worth £10m or more paid 10 per cent Inheritance Tax on average, compared to 20 per cent paid by estates worth between £2m and £3m.

According to analysis by Canada Life, this gap in tax was due to the different asset composition for estates of different sizes. Larger estates typically had a smaller percentage of their value in UK residential property (10 per cent), which doesn’t have high levels of tax efficient exemptions, and a much higher amount in securities (40 per cent), such as shares in AIM companies qualifying for Business Relief, which can attract 100 per cent tax relief.

Smaller estates should be benefiting more from the available reliefs to reduce Inheritancxe Tax.

– Enhanced investment returns

Business Relief has proved a simple way of avoiding Inheritance Tax while at the same time greatly enhancing investment returns and supporting UK business growth. However, despite its simplicity and growing popularity, it remains little used.

According to accountants UHY Hacker Young, HMRC forecasts showed how UK taxpayers were expected to reduce their Inheritance Tax bills by 12%, or a record £710m in 2017/18, through investments made in unlisted companies and other business assets. With an overall inheritance Tax take of £5.3billion and rising, there is therefore clearly scope to use Business Relief to further lessen tax bills.

– Invest in growth

The main UK stock market has woefully underperformed the US stock market over recent years, with the former dominated by many low growth companies of a bygone era, saddled with huge amounts of debt and large pension legacies.

Smaller, more nimble companies, on London’s growth market AIM have delivered material outperformance over a number of years and many of these growth stocks come with the added attraction of Business Relief.

Mark Giddens, Partner at UHY Hacker Young, commented: “Encouraging investment in AIM shares and other unlisted companies is good for the broader economy as they create growth and jobs.”

– 15 year track record of investment growth and tax saving

Fundamental Asset Management has been successfully investing in AIM for over 15 years and while many of our clients are initially drawn by the potential Inheritance Tax benefits, the investment attractions soon become apparent – our recent Blog on AIM portfolio holding AB Dynamics illustrates the potential returns.

Since inception in September 2004, Fundamental Asset Management’s AIM for Inheritance Tax planning portfolios rose 320% on average to the end of 2018. By comparison, over the same period, the leading index of UK listed companies had only risen 120%. Even the better performing US S&P 500 index only managed 201% growth over that period.

Performance of Fundamental AIM portfolios vs leading stock market indices

The 15 years may have featured periods of weakness from AIM (and some occasional company failures) yet the patient, diversified portfolio approach has been highly rewarding over the long term.

Furthermore, unlike investments in unlisted companies, AIM shares can also be sold, with cash returned to investors at short notice if required.

There are some fantastic growth companies on AIM, many of which are covered by our associates at Investor’s Champion. We would urge investors to look at AIM for its investment attractions and not simply the tax benefits, although letting the tax tail wag the investment dog, has ironically proved highly beneficial for our clients!