aim inheritance tax portfolio - tattoninvestments.com · tatton nshore tax trategies 3 1. gaining...

Aiming to reduce your inheritance tax bill

AIM Inheritance Tax Portfolio

Tatton Onshore Tax Strategies2

“ For those investors prepared to accept the additional risks of investing in AIM, there are tax benefits. AIM stocks are free of stamp duty. They can be included in Stocks & Shares ISAs. And some companies on AIM are exempt from IHT, thanks to a government approved tax incentive known as Business Relief. ”

Tatton Onshore Tax Strategies 3

1. Gaining an exemption from inheritance tax 5

2. More families pay inheritance tax 6

3. AIM: the market for small, growing companies 9

4. Taking advantage of Business Relief 11

5. Prudent management for a high-risk market 15

6. Building and managing your AIM portfolio 18

7. How Tatton’s AIM portfolio reduces IHT bills 20

8. Key benefits and risks of Tatton AIM IHT Portfolio 22

9. Fees and charges 24

10. Frequently asked questions 26

Tatton Alternative Investment Market Inheritance Tax Portfolio


About Tatton

Tatton Investment Management Limited (TIML) is authorised and regulated by the Financial Conduct Authority (firm reference number 733471). TIML is a leading investment manager with more than £3.5 billion (January 2017) in assets under management. It provides portfolio management services to private and corporate clients, trusts, charities and pension funds. Its mission is to provide excellent value for money, without compromising on the level of investment management effectiveness offered.TIML is a specialist investment manager for platform-based portfolios. This allows the management of clients’ investments through existing holding arrangements, which gives clients peace of mind that their investments are always in their chosen place, and continues to provide the quality of reporting and access to investments that they are familiar with.This service is now complemented by a new service from Tatton Onshore Tax Strategies (“Tatton”), a trading style of Tatton Investment Management Limited, which offers access to a selection of carefully chosen stocks listed on the UK’s Alternative Investment Market (AIM stock market).


Gaining an exemption from inheritance tax

Tatton’s AIM IHT Portfolio offers access to carefully-selected stocks listed on the UK’s AIM stock market that could become exempt from inheritance tax after being held for just two years

Without adequate estate planning in place, individuals wishing to leave their estate to their

family risk losing a large proportion to inheritance tax when they die. Tatton recognises the concern that this can cause, both for individuals and their families, and has an investment option which can mitigate the risk: our AIM IHT Portfolio.

Working with your financial advisorThis investment service is only available through financial advisers. Tatton works closely with the adviser to make sure clients’ personal financial objectives and aspirations are always paramount while focusing on managing the portfolio and taking the investment decisions. This forward planning is the basis of our approach to planning for inheritance tax (IHT).

“This investment service is only available through financial advisers

”


More families pay inheritance tax

Inheritance tax (IHT) is a tax liability that is affecting a growing number of UK families

HM Revenue & Customs (HMRC) expects to collect a record £4.6 billion in IHT in the 2015/2016 tax

year1. Meanwhile, the number of estates expected to pay an IHT bill after the death of a family member has increased from 15,000 in 2010 to 40,000 in 20162.

Under the current rules, if a person dies leaving an estate valued at more than £325,000 (known as the nil rate band or NRB), then the estate is charged IHT at a rate of 40% on the assets valued over that amount. Many people are unaware that investments such as Individual Savings Accounts (ISAs) can also be subject to inheritance tax if the NRB is exceeded.

The Finance Act 2016 introduced an additional NRB, the ‘residence nil rate band’, which will be phased-in between 2017 and 2021. This is intended to raise the IHT threshold to £1 million for couples by 2021. However, unlike the NRB, it does not apply to everyone. In fact, it is only of real benefit to individuals, married couples and civil partners who intend to pass on their home to their children or grandchildren. For estates that are valued at more than £2 million, the relief available is drastically

1 Office for National Statistics, April 2016.2 Office of Budget Responsibility, April 2016.


reduced. The table below, using a hypothetical example, shows that the new NRB will not substantially decrease the amount of IHT due on an estate.

Calculating inheritance tax liability for an unmarried person

Value of estate In 2016 Between April 2017 and March 2018

Home £500,000 £500,000

Share portfolio £400,000 £400,000

ISA savings £100,000 £100,000

Value of estate before IHT £1,000,000 £1,000,000

Deduct current nil rate band £325,000 £325,000

Deduct residence NRB* 0 £100,000

Estate liable for IHT £675,000 £575,000

IHT bill £675,000 x 40% = £270,000 £575,000 x 40% = £230,000

Estate after IHT bill paid £730,000 £770,000

This example is based on the death of an unmarried person before April 2018, who intends to leave their home to their children or grandchildren and is eligible for the residence NRB (to be introduced from April 2017).

* The new residence NRB will rise annually by £25,000 until 2021, and by inflation annually thereafter.

Reducing your inheritance tax liabilityThere are several well-established ways in which you can reduce or eliminate the IHT due on your estate. For example:

» You could spend your wealth now


» You could make gifts to reduce the value of the estate you leave behind. However, it may take seven years before they become fully IHT exempt

» You could put your assets into trust, which would make them free of IHT after seven years

» You could take out a life insurance policy that would pay out enough to cover an IHT bill after you die

These traditional ways of estate planning can be expensive, complicated and usually result in investors losing direct control over their assets. Also, most only offer IHT exemption after seven years. For many people in later life, that is simply too long to wait.

However, there is an alternative. One of the biggest attractions of investing in UK stocks listed on the Alternative Investment Market (AIM) is that certain businesses can qualify from 100% relief from IHT as well as offering strong investment returns.

At Tatton, we are not tax experts, but we are investment specialists. We have developed a robust investment process which we believe helps us identify profitable growing businesses that may also qualify for 100% IHT relief. An investment in the Tatton AIM IHT Portfolio, even ISA investments, should become free from IHT after just two years.

“We have developed a robust investment process which we believe helps us identify profitable growing businesses that may also qualify for 100% IHT relief

”


AIM: the market for small, growing companies

Whereas the London Stock Exchange (LSE) is usually the place for larger, more established companies to list their shares, the Alternative Investment Market (AIM) was established in 1995 as the home for smaller, growing companies seeking access to capital. Just two decades later, AIM is widely recognised as the best growth market in the world.

Over the years, AIM has become home to a broad and diverse range of companies from a variety of

different sectors and at different stages in their own development. While the regulatory requirements for AIM are less stringent than for LSE-listed companies, companies seeking a listing on AIM still have to meet certain strict criteria before being granted a listing.

For those investors prepared to accept the additional risks of investing in AIM, there are tax benefits. AIM stocks are free of stamp duty. They can be included in Stocks & Shares ISAs. And, as we will explain in the next section, some companies on AIM are exempt from IHT, thanks to a government approved tax incentive known as Business Relief.


Tatton believes investors should first consider the merits of investing and think of the tax benefits as an added bonus not the sole reason to invest. Because of their high growth nature, AIM stocks tend to be considered at the higher end of the risk/return investment spectrum. Compared to larger stocks, AIM stocks can be more volatile, particularly during general stock market downturns, and carry a higher risk of company failure. They can also be harder to buy and sell, as the market for the shares is considerably smaller. Because of this, AIM is considered to be a market that requires an appropriate amount of investment knowledge and equity trading experience.

Therefore, investing in AIM is mostly suitable for investors who have a long-term horizon for their investment, and are both willing and able to accept the higher risks associated with investing in such companies. In addition, investors should recognise that the IHT benefits are made available by the Government as a way to offset some of the risk of investing in AIM-listed companies.

ImportantThe value of AIM-listed stocks can go down as well as up. Your capital is at risk and you may not get back all the money you invest. AIM stocks can be more volatile than the broader UK stock market and may be subject to limited liquidity. Past performance is no guide to future returns.


Taking advantage of Business Relief

Shares in companies that qualify for Business Relief become exempt from IHT in two years. But because company eligibility can change, it is important to have a dedicated portfolio manager who continually monitors your holdings.

Business Relief, previously known as Business Property Relief (BPR), was introduced as an

inheritance tax relief in 1976. It is a tax incentive aimed at encouraging investment into actively trading companies, including those listed on AIM. Not all companies are eligible for Business Relief, and it is not available for companies listed on the main London Stock Exchange.

Shares in a company that qualifies for Business Relief become exempt from IHT after two years, provided that the shares are still held at the time of death. If the holder of the shares dies before the two-year period is reached, the shares can be passed to a surviving spouse or civil partner. They can inherit the shares without restarting the two-year holding period.

While ISAs offer tax-free growth and capital gains during an investor’s lifetime, the tax-free benefits of an ISA wrapper cease on the death of the ISA holder. However, if an investor holds shares that qualify for Business Relief within an ISA, these shares will also

“Business Relief was introduced as an inheritance tax relief in 1976

”


become exempt from IHT after two years, meaning the tax-free benefits of the ISA wrapper can be passed to beneficiaries.

HM Revenue & Customs (HMRC) and the Inheritance Tax Act 1984 provide us with a solid framework to examine firms for their potential to qualify for 100% of Business Relief. However, these rules can change over time, and there’s no guarantee that a company that qualifies for Business Relief now will continue to do so in the future.

Therefore, it’s important to engage the services of a dedicated portfolio manager who can monitor holdings and make investment decisions based on the continued eligibility of the shares invested in.

Business Relief qualifying rulesBusiness Relief is intended to help small or fledgling companies get access to capital markets and therefore obtain finance for further growth.

The Inheritance Tax Act 1984 says that 100% IHT relief is effectively available on company shares that are not listed on a recognised stock exchange (known as unquoted companies) that would classify as “relevant business property”. AIM shares qualify as an unquoted investment.

Generally, if a business is benefitting the UK economy by adding to domestic activity, then in theory, it should qualify for Business Relief. However, there are certain restrictions to qualifying. For example, shares


must not have a dual listing; such as a resource stock listed somewhere overseas while also being listed on AIM.

Business Relief restrictionsHMRC has given some guidance about where a party would be unable to claim Business Relief:

» A business that mostly deals in securities, stocks or shares, land or buildings or in making or holding investments

» If the entity is a not-for-profit

» If the business is in the process of being sold

» If the company is in the process of being wound up

A number of AIM-listed stocks are structured as holding companies. HMRC states that Business Relief is available for such holding companies, as long as its revenues are not mostly derived from property, investing or dealing.

Where does property fit in?If a firm has substantial property assets that are only partially used by that company, it could be subject to HMRC’s partial exemption rules. HMRC may classify such holdings as “excepted” assets, if the company is not using these properties as part of its normal business activities during the two-year holding period. This means that investment trusts or real estate investment trusts (REITS) are non-qualifying.


However, a house building company would qualify under the existing rules.

What about companies making or holding investments? It can often be difficult to assess whether a company is an investment business or not, particularly if “Financial Assets” on a firm’s balance sheet represent a large proportion of the company’s net asset value. This might suggest that it makes or holds investments. However, in this instance we would investigate if such assets were part of its trading activities or merely a by-product, and make an investment decision based on our conclusions.


Prudent management for a high-risk market

AIM is a high-risk growth market. Within your portfolio, Tatton manages these risks by carefully investing in a broad number of companies.

The Tatton AIM IHT Portfolio targets companies with a business plan focusing on organic sales

growth. We then analyse the financial strength of each of these companies, and meet the management teams of the company to ensure they fulfil our criteria.

We will only invest when we believe we have found the right company with the right potential at the right price. While AIM features more than 1,000 companies, we look to invest in a carefully selected portfolio of 30-50 stocks. We continually monitor the company’s ongoing performance.

Our intention is not to invest in companies that are broadly similar, where performance is likely to be adversely affected by the same events at the time. For example, we would not invest all your money into a single industry sector. Neither would we invest in companies where returns are likely to be ‘all or nothing’ – say, a biotech company where share price rises are wholly dependent on the success or otherwise of a single event, in this case the discovery of a new drug.

“We will only invest when we believe we have found the right company with the right potential at the right price

”


The stocks we select will be chosen from a variety of different sectors, but all have the same characteristics of (a) long-term investment potential and (b) are conducting trades that potentially make them eligible for Business Relief.

HMRC does not publish a list of companies that qualify for Business Relief. Eligibility will be determined by HMRC at the point it is claimed, which is after the owner of the investment has died and when probate is sought. This means that investors will need to be aware that their AIM stock holding may face the issue that a company that qualifies today might not always do so in future. This is where Tatton’s active oversight and monitoring play an essential role in achieving IHT exemption.


AIM company profile: Majestic Wine PLC

Formerly known as Majestic Vintners, Majestic Wine opened its first wine warehouse in Wood Green, North London, in 1980. Since then, it has expanded continuously. The company listed on AIM in 1996, opened its 200th store in 2013 and has spent recent years developing its online presence, acquiring Naked Wines in 2015. The group has consistently recorded robust profit growth. For the year ending March 2015, the company earned £18.4 million and reported turnover of £284.5 million.

AIM company profile: CVS Group

Established in 1999, CVS Group (Consolidated Veterinary Clinics) is now one of the UK’s leading providers of veterinary services. It owns more than 350 veterinary surgeries, employing around 822 vets, throughout England, Scotland and Wales. The Group listed on AIM in 2007, and has consistently expanded its sales. For the year ending September 2015, it reported sales of 167 million, generating cash from operations of £22.2 million.

“This is where Tatton’s active oversight and monitoring play an essential role in achieving IHT exemption

”


Building and managing your AIM portfolio

The Tatton AIM IHT Portfolio is a discretionary managed service

This means that Tatton will assemble a portfolio of stocks and continue to carefully manage this

portfolio on your behalf to capture the inheritance tax advantages and mitigate risks through diversification and ongoing monitoring.

We will only target those companies whose businesses we fully understand. To aid us here, we research every company thoroughly using our own resources, broker research and independent external research companies.

A key element to our disciplined research process is the company visits we carry out to ensure companies comply with our rigorous investment criteria. If we are not completely confident in every aspect of a company, we will not invest in it.

We believe there are four main sources of investment ideas:

» Company meetings

» Broker company research

» Fundamental analysis of companies

» Tatton’s valuation screening process


Our investment process

Brokers, companies, Tatton screen

IHT Business Relief filters

Companies ranked & initial assessment made against specific valuation criteria

Fundamental & bottom-up research

Full risk assessment

Meet firm

Implementation and ongoing management of each stock


How Tatton’s AIM portfolio reduces IHT bills

Take the example of Mrs Smith, an individual with an equity portfolio valued at £400,000.

Mrs Smith’s NRB is used up entirely by the value of her home, which means that if she continues to hold her equity portfolio at death, it will be liable to IHT at 40% on the total value (£400,000 x 40% = IHT bill of £160,000).

If Mrs Smith chooses to sell her equity portfolio and invests the proceeds (minus any capital gains liability) in the Tatton AIM IHT Portfolio her estate would become IHT exempt after two years. (See table opposite.)


Effects of IHT exemption on estate left to beneficiaries

Estate without an IHT portfolio

Estate with Tatton AIM IHT Portfolio

Value of property £325,000 £325,000

Value of investments £400,000 £400,000

IHT payable upon Mrs Smith’s death £160,000 Nil

Estate available to Mrs Smith’s beneficiaries £565,000 £725,000

This calculation is for illustration purposes and does not assume any investment growth. It also does not include any investment fees and charges. It assumes that the investor has held the shares for at least two years and held them at the time of her death. It also assumes that the investor transfers the full amount of the value of her investments into the Tatton AIM IHT Portfolio. Tax benefits will depend on the investor’s individual circumstances. Tax rules and tax treatments may change in the future.

The Financial Conduct Authority does not regulate taxation and trust advice.


Key benefits and risks of Tatton AIM IHT Portfolio

BENEFITSTatton AIM IHT Portfolio

RISKSTatton AIM IHT Portfolio

Speed and efficiency Other forms of estate planning can take seven years to become fully IHT exempt. However, the investments in the Tatton AIM IHT Portfolio should become 100% IHT exempt in just two years, as long as the shares are still held upon death.

Your capital is at risk In contrast to other forms of estate planning, the Tatton AIM IHT Portfolio is a stock market investment. This means that your capital is at risk and you may get back less than the amount you originally invested. It should be considered a long-term investment.

No loss of access to the investment Estate planning strategies such as settling assets into trust or making gifts result in you losing control over your wealth. With the Tatton AIM IHT Portfolio, the shares are held in your name, meaning you continue to have ownership rights over your assets.

Tax reliefs are not guaranteed The tax reliefs explained in this brochure depend on your individual circumstances. There’s no guarantee that tax reliefs will remain the same in the future.

Growth potential AIM is home to more than a thousand companies that could offer strong growth potential. This means that your investment could grow in value, instead of being eroded by inflation.

AIM-listed shares are higher risk AIM stocks are small and generally can be more volatile and considered higher risk than shares in large listed companies.

Strict investment selection criteria The Tatton AIM IHT Portfolio benefits from a tried and tested investment process that ensures companies are deemed suitable investments and meet the criteria for Business Relief qualification.

Your investment may be difficult to sell As the market for shares listed on AIM is smaller than the market for larger listed shares, it can be difficult or take longer to sell an investment, particularly if this needs to be achieved in a short period of time.


BENEFITSTatton AIM IHT Portfolio

RISKSTatton AIM IHT Portfolio

Speed and efficiency Other forms of estate planning can take seven years to become fully IHT exempt. However, the investments in the Tatton AIM IHT Portfolio should become 100% IHT exempt in just two years, as long as the shares are still held upon death.

Your capital is at risk In contrast to other forms of estate planning, the Tatton AIM IHT Portfolio is a stock market investment. This means that your capital is at risk and you may get back less than the amount you originally invested. It should be considered a long-term investment.

No loss of access to the investment Estate planning strategies such as settling assets into trust or making gifts result in you losing control over your wealth. With the Tatton AIM IHT Portfolio, the shares are held in your name, meaning you continue to have ownership rights over your assets.

Tax reliefs are not guaranteed The tax reliefs explained in this brochure depend on your individual circumstances. There’s no guarantee that tax reliefs will remain the same in the future.

Growth potential AIM is home to more than a thousand companies that could offer strong growth potential. This means that your investment could grow in value, instead of being eroded by inflation.

AIM-listed shares are higher risk AIM stocks are small and generally can be more volatile and considered higher risk than shares in large listed companies.

Strict investment selection criteria The Tatton AIM IHT Portfolio benefits from a tried and tested investment process that ensures companies are deemed suitable investments and meet the criteria for Business Relief qualification.

Your investment may be difficult to sell As the market for shares listed on AIM is smaller than the market for larger listed shares, it can be difficult or take longer to sell an investment, particularly if this needs to be achieved in a short period of time.


Fees and charges

Tatton’s aim is to adopt a clear, fair and honest charging structure that aligns your long-term goals with ours. Our fees are charged based on a percentage of the value of what you choose to invest with us.

T atton has an annual management charge of 1.25% including VAT and a 0% initial charge. The platform on which you hold your shares

will charge dealing fees for transactions of AIM shares of £10/per trade plus a 0.15% brokerage charge. However, Tatton will always try to keep portfolio charges to a minimum. It does this by carrying out transactions over a number of AIM IHT portfolios, thereby spreading the costs among a broad pool of investors. For example, if we purchase shares, and the cost of making that share purchase is £100, this cost will be shared equally among all investors. So if there are 100 investors the dealing cost would be £1 for each investor.

However, where an individual client is selling their portfolio and trading is required outside normal activity these costs may be charged to that client.

Please see the appropriate discretionary management agreement for full details of fees and charges.


Your financial adviser will be able to discuss with you whether this investment service is appropriate to your needs.

Keeping in touchTatton will keep you up-to-date on the progress of your investment with quarterly reports and reviews every six months. Additionally, your platform will provide you with complete transparency and access to daily valuations of your investments.

We will show you how the companies within your portfolio have performed, and we will compare the performance of your investment with the performance of the FTSE AIM All Share index and the FTSE All Share index over the same time periods.

“Tatton will always try to keep portfolio charges to a minimum

”


Frequently asked questions

What is the minimum amount I can invest?The minimum investment is £25,000 for general accounts and £15,000 for ISA accounts. This can be a combination of a taxable investment account and an ISA wrapper.

Who is this service suitable for?Tatton’s AIM IHT Portfolio is appropriate for two distinct types of UK investor clients, with the potential for a client to fit into both categories. Firstly, this service is suitable for clients who are concerned that they will have a significant inheritance tax liability that will reduce the value of the estate left to their beneficiaries. Secondly, it is suitable for investors who would like some exposure to AIM-listed companies as part of their overall investment strategy. Both types of clients must be willing to accept that investments in AIM-listed companies carry higher risk than shares in larger listed companies.

What if I need access to my money?One of the benefits of this service compared to other traditional forms of estate planning is that you retain access to your money should you need it, to pay for care home fees, for example. You can simply ask us to sell shares and we will arrange this for you. Please note that it can be difficult or take longer to sell an investment because of the smaller size of the market. However, any money withdrawn from the service will no longer be exempt from IHT, and will again become part of your estate for IHT purposes.

Can I make an investment under a Power of Attorney or court order?Yes. Because the Power of Attorney has sought professional advice from a financial adviser and because the investment is held in the name of, and for the benefit of the client for whom the Power of Attorney is acting, we are able to invest under a Power of Attorney. We will not accept an investment into this service without advice having been sought from a financial adviser.


When does the two-year qualification period for Business Relief start?It begins on the date that we make an investment. Unless you instruct us otherwise, we will typically invest your money within three to six weeks of your deposit, but allow for a maximum of three months. The time taken to invest is intended to lessen the impact of any market volatility when shares are purchased.

Does the two-year window restart after the sale of a Business Relief qualifying investment?No. As long as the proceeds of a sale are reinvested into another investment that qualifies for Business Relief, then the holding period does not restart. HMRC allows a maximum time of three-years for re-investment. If a capital gain arises from the sale of an investment, you may need to pay capital gains tax at the appropriate rate.

What if I die within two years?Your portfolio can be transferred to a surviving spouse or civil partner without the two-year qualification period for Business Relief restarting. If you do not have a spouse or civil partner, your portfolio will be considered part of your estate for IHT purposes.

Regulatory disclosureThe information in this document does not constitute advice or a recommendation for any product and you should not make any investment decisions on the basis of it. Tatton Onshore Tax Strategies is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority.

web tattontax.com address 125 Old Broad St, London EC2N 1AR telephone 020 7190 2959

All calls to and from our landlines and mobiles are recorded to meet regulatory requirements.

© Tatton Onshore Tax Strategies 2018

aim inheritance tax portfolio - tattoninvestments.com · tatton nshore tax trategies 3 1. gaining...

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