Life’s Too Short To Bother With IHT Avoidance

http://www.ft.com/cms/s/0/63b73472-d36d-11e2-b3ff-00144feab7de.html#ixzz2X2FlNRb4 By Jonathan Eley Ways of avoiding it are generally not worth it How’s this for a business proposition? You invest a minimum of £25,000 into a new and unquoted company that promises to develop renewable energy projects. It is targeting an annual return of 6 per cent return, but will incur costs of up to 2.5 per cent. There’s also a 2.5 per cent initial charge, and the investment will only be accessible through a professional adviser, who doubtless will not be working for free either. Framed in those terms, it doesn’t sound particularly compelling, does it? The likely net return of 3.5 per cent is broadly comparable to the yield on the FTSE 100. Why put a fixed sum into an unquoted start-up venture with fairly stiff charges when you could put money into a tracker fund with rock-bottom costs, get the same net return just from the dividends paid by Britain’s largest and most financially secure companies, hopefully enjoy some price appreciation, and be able to sell any time you want? The answer is that money in the tracker fund would not be shielded from inheritance tax, which is the primary purpose of Albion Community Power, the product described above. Backed by Albion Ventures, once part of Close Brothers, it launches this week and aims to raise £25m from individual investors. It will be chaired by the Conservative MP Tim Yeo, a former energy minister who this week stepped aside as chairman of the Commons energy committee while allegations of influence-peddling are investigated. Albion says it has done lots of research that shows how worried people are about inheritance tax – of the 2,000 individuals it polled, 61 per cent had already taken advice about how to mitigate IHT, or planned to do so. Based on its figures, it estimates that over a million households expect to leave an average inheritance of more than £613,000. It proposes a “solution” to inheritance tax by utilising business property relief, which exempts qualifying investments from inheritance tax once they have been owned for two years or more. This is the same relief utilised by various other IHT avoidance ruses, such as shares quoted on the Alternative Investment Market, Enterprise Investment Schemes, farmland, forestry and so on. However, there’s a big snag with business property relief. It’s designed to facilitate the transfer of real businesses from one generation to another without incurring huge tax bills, or the funding of new growth companies. It’s not really intended to allow the rest of us to avoid paying tax on the accidental accumulation of housing wealth, which is what many are now effectively using it for. Many of the ventures that qualify for BPR will by definition be small and risky with a higher than average chance of failure. Their shares may not be easy to trade – or may not be traded at all – so you or your heirs might not be able to sell when you want or the price you want. In short, they are probably the sort of investment that you should be avoiding towards the end of your life. ACP has lessened the risks somewhat by focusing on renewable energy, which is backed by a myriad of government subsidies and reliefs, many of which are inflation-linked, and where it has past form – Albion Ventures says its existing renewables projects are generating returns of 11 per cent. Still, there are many other ways to avoid inheritance tax, most of which don’t involve risky investments and don’t cost much. You could set up a trust and place assets within it. This allows you to retain some control over how those assets are used while they are in the trust, because settlors are allowed to be trustees (just not beneficiaries). The assets lie outside your estate, although they are not completely exempt from tax charges. You can also make gifts out of surplus income, provided you can prove that the gifts are regular and that your everyday standard of living is not affected. Better still, you can give money away while you’re still alive. That way, you get to influence how it’s spent, enjoy the gratitude of the recipients, and get a warm glow from knowing that you are boosting the economy and facilitating the transfer of wealth and property to younger generations at a time when they most need it. There are two main snags with these approaches, though. One is that you cannot change your mind. You cannot withdraw money from a trust, nor can you ask your nephew to sell that snazzy sports car he bought with your surplus income in order to pay for your long-term care. The other is the “seven-year rule” – for larger gifts to lie completely outside your estate, you generally have to soldier on for another seven years. So whichever way you do it, avoiding IHT involves a lot of risks, uncertainties and trade-offs. That’s no coincidence. You’re not meant to avoid it. The Treasury collected £2.9bn from IHT in the 2011/12 tax year, and expects that figure to rise to £4.1bn in 2017/18 (see chart). No wonder the Conservatives, who in opposition advocated a nil-rate band of £1m, have now frozen the allowance at £325,000 until 2018, thus ensuring that more people will end up paying it. Is avoiding IHT really worth the bother? I’d say not. IHT is primarily a tax on wealth accumulated by accident, usually via an asset which is, stamp duty aside, largely untaxed elsewhere in the system. There is already a large nil-rate band and transfers between spouses are exempt. If you’re that worried about IHT, don’t wait to become a millionaire corpse: downsize and donate while you’re still alive. After all, you can’t take it with you. jonathan.eley@ft.com Taylor Scott International