In 2018/19, HMRC received £5.4 billion in inheritance tax payments, an increase of 3% (£166 million) on 2017/18. HMRC’s inheritance tax take has been on the rise each year since the 2009/10 tax year and is now at a record high.
Inheritance tax is due on a range of assets and transfers, such as:
If you’re a single individual and the total sum of assets such as your home, cash in the bank, stocks and shares etc., plus certain gifts made within 7 years of your death, add up to more than £325,000, you will typically have to pay inheritance tax at 40% on everything above this threshold.
In addition to various inheritance tax allowances outlined above, there are also reliefs and exemptions for certain assets.
The two main reliefs mentioned in HMRC’s inheritance tax statistics are Agricultural Property Relief (APR) and Business Property Relief (BPR).
The combined cost of APR and BPR to the Treasury (i.e. the amount HMRC would have received were it to have taxed the assets the relief was due on) was £2.1 billion in 2016/17. This is down by 18% compared to 2015/16.
Business Property Relief is a much more ‘useful’ relief in the world of inheritance tax than Agricultural Property Relief as it can be used by investors looking to minimise the amount of inheritance tax they pay.
This is compared to Agricultural Property Relief, which is only really useful to those involved in farming.
BPR was introduced to protect business owners from inheritance tax on their business assets.
While any ownership of a business, or shares held in a business, is included in the estate for inheritance tax purposes, you can get Business Property Relief at either 50% or 100% on some of an estate’s business assets.
These assets can be passed on either as gifts, while the owner is still alive, or as part of a deceased person’s estate in their will.
Business Property Relief is available at 100% on:
Meanwhile, Business Property Relief is available at 50% on:
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
You’re unable to claim Business Property Relief on:
You can’t claim Business Property Relief on an asset if it also qualifies for Agricultural Property Relief.
Business Property Relief, as mentioned, extends to include the ownership of shares in any unlisted company. It also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery or have such assets held in a trust.
This means you don’t have to be a business owner to benefit from Business Property Relief — you can simply hold shares in a qualifying business. Providing you’ve held those shares for at least 2 years at the date of you death, they can pass to your beneficiaries free of inheritance tax.
As we know from the above, inheritance tax is charged on all assets you hold at the date of your death. This includes money held in cash ISAs.
However, a rule change back in 2013 means that alternative investment market (AIM) listed stocks can now be held in an ISA.
This means that, for those who can tolerate the added volatility, individuals can construct ISA portfolios consisting of shares in unlisted or AIM-listed companies. This is because even small companies listed on the AIM market have always been regarded as being ‘unlisted’ for the purposes of inheritance tax.
The rules for Business Property Relief mean that the majority of AIM-listed stocks qualify for a full exemption from IHT while others qualify for partial relief (providing you’ve held them for 2 years at the date of your death).
For those who are in the process of estate planning, and who can afford to shoulder the additional investment risk and greater charges that accompany investment in the AIM market, this could be good news.
It means that those with substantial ISA portfolios that may have been built up over many years can transfer these assets to an AIM portfolio and so help mitigate any potential inheritance tax liability on the whole of their portfolio.
Not all AIM stocks automatically qualify for inheritance tax exemption. Companies that deal in securities, stocks and shares, land or commercial buildings or which are dedicated to making or holding investments are barred from the relief. We recommend you always seek advice before investing in AIM shares with the aim of reducing your inheritance tax bill.
Senior Paraplanner at Drewberry
The government launched Enterprise Investment Schemes (EIS) in 1994 to encourage investment in smaller, startup companies.
The nature of the companies you invest in through an Enterprise Investment Scheme mean that these investments are a high-risk option with a greater chance of losing some, if not all, of your capital. This is because not every small startup company will succeed.
To compensate for the enhanced risk involved in putting your money into such companies, the government offers a variety of tax reliefs to those investing in Enterprise Investment Schemes including, crucially for inheritance tax planning, Business Property Relief.
Providing you’ve held the shares in a qualifying EIS for at least 2 years at the date of your death, they will typically be eligible for Business Property Relief and fall outside of your estate for inheritance tax purposes.
Note that this isn’t available for shares listed on a stock exchange recognised in the inheritance tax legislation.
Other reliefs available on an EIS include income tax relief and capital gains tax relief.
When making your initial investment in a qualifying EIS, you get upfront income tax relief at 30% of the cost of the shares. So, if you invest £10,000, you can reduce your income tax bill by £3,000 that tax year. You can also “carry back” this relief to help reduce your income tax liability in the previous year.
There’s also no capital gains tax to pay on any profits you make from an EIS investment. If your investment performs badly and you make a loss, you can offset that loss against income tax. You must hold EIS investments for a minimum of 3 years in order to qualify for capital gains tax and income tax relief.
The maximum amount you can invest in any one company is £1 million, and there is no minimum. Investing in an EIS usually requires you tying up your money for a long period of time, so they won’t suit you if you need access to your savings.
An EIS is a high-risk investment that can be illiquid and difficult to sell. It’s unlikely to be suitable for those with low risk appetite or those who may need ready access to their funds. Discuss such investments with your adviser before going ahead — they should be considered only after other forms of tax-efficient investments have been examined.
Seed Enterprise Investment Schemes (SEIS) were introduced in 2012. They work in a similar way to an EIS, except you invest in even smaller start-up companies. These are particularly high-risk, so investors are offered even more generous tax breaks.
You receive income tax relief at 50% with a SEIS, which means for every £10,000 you invest, you can deduct £5,000 off your income tax bill. There’s no capital gains tax to pay and as with EIS, you can offset any losses against your tax bill as well.
There are other capital gains tax benefits also. If you’ve recently had to pay capital gains tax on other investments, you can reclaim up to 50% of this as long as you reinvest the money into SEIS.
The maximum you can invest though SEIS in any one tax year is £100,000.
As with Enterprise Investment Schemes, Seed Enterprise Investment Schemes are generally eligible for Business Property Relief (providing you’ve invested in qualifying shares) as long as you’ve held the investment for at least 2 years at the date of your death.
There’s usually no inheritance tax to pay when you pass on a pension to beneficiaries. This is because the pension is treated as held outside your estate in trust for inheritance tax purposes.
While you can nominate beneficiaries to receive the pension should you pass away, the pension provider pays the beneficiary at their discretion rather than being bound by your wishes as a rule. It is this discretion that means inherited pensions are assets that are inheritance tax free.
If you die before the age of 75 your beneficiaries won’t typically have to pay any tax on an inherited drawdown pension fund regardless of how they choose to take the money.
They can take the money as one lump sum, continue with drawdown income or buy an annuity — all options will be tax-free providing they do so within 2 years of your death. They don’t have to reach 55, the age at which you get access to your own defined contribution pension, before they start taking it.
If you die after the age of 75, there is income tax to pay on an inherited pension drawdown arrangement. Your beneficiaries can still choose to take the fund as a lump sum, take flexi-access drawdown income or buy an annuity, but each option will be taxed as income at their highest marginal rate.
Before embarking on any inheritance tax planning, especially with a view to invest in assets to reduce the value of your estate for inheritance tax purposes, we recommend you speak to an expert.
There’s a lot of mistakes that are easy to make in this area that could prove costly. Plus you may be able to explore options with less risk to achieve the same aim, perhaps by gifting part of your estate and insuring that gift or other means.
The team at Drewberry is only ever a phone call away — we’re available on 02084327334 to discuss your inheritance tax, pension and investment needs.