Release equity via AIM or LTD Company Holiday Let

by **marc02** on Thu May 21, 2009 12:36 pm

I hope someone can help. My grandmother would like to reduce the value of her estate. To do this we have been advised to release equity from her house and invest this into AIM share. In two years time, my grandmother would then be able to gift the AIM shares exempt of IHT.

I would like to ask; must this equity investment be in the AIM, or can it be in a Limited Company?

The reason I ask is: Could we setup a Holiday Let Ltd Company and the company then use the equity to purchase a holiday let property? We would then employ management agents to run the holiday let. I refer to a holiday let as it is my understanding this would not be considered an investment company?

Would this be tax effective? Are we simply better off to purchase equity in AIM?

Thank you.

by **Arnold Aaron** on Thu May 21, 2009 1:38 pm

The qualify for the business property relief for Inheritance Tax emeption, the funds must be invested in a any qualifying asset e.g qualifying AIM shares, or a LTd. company which is a trading company i.e. not a property company or investment business etc.

The asset must be held for 2 years at which point it becomes exempt from IHT. However, the asset is not gifted at that point, it simply stays in full posession of the person until death.

This is only really appropriate where the person definitely accepts or wants to take investment risk, and where they are not in good health and so not likely to survive 7 yrs.

by **Arnold Aaron** on Thu May 21, 2009 1:50 pm

Further, the idea to borrow on an equity release to put the money into shares on the AIM really is really daring planning risk wise - if the shares drop the family would have paid so much interest, and inherited the depleted value of the shares so they may end up with less than if they did nothing and paid inheritance tax! - Tread very carefully.

I am not against the AIM, nor doing an equity release, but this is only for one who understands and is open or want to take the risk. Has the advisor pushed your grandmother into taking more risk than she understands or is willing to take?

by **marc02** on Thu May 21, 2009 2:31 pm

Is the risk mitigated with the FHL option, described in the first post? FHLs are not treated as a property company or investment, but as trading company?

Although the 2009 budget has proposed potential changes to this, I am not sure on the extent of impact the budget has had on this, if at all.

by **Arnold Aaron** on Thu May 21, 2009 2:56 pm

yes, FHL should qualify, but a lawyer would better know the rules around this and whether they were changed in the budget.

by **marc02** on Thu May 21, 2009 5:51 pm

Thanks Arnold. I hope one of the solicitors may be able to shed light on this.

by **Lee Young** on Thu May 21, 2009 10:03 pm

I am not sure the detail of the abolishment of the favourable FHL rules has been published yet - it doesnt happen till 6 April 2010 so presumably this will be found in next year's finance bill. That said I suspect that a property ran along the FHL lines with interaction from the owner with the holiday makers should still potentially benefit from BPR.

by **AvocadoK** on Thu May 21, 2009 10:29 pm

Re FHLs - as Lee says there is no draft legislation yet but HMRC have issued a technical note on the proposals:

http://www.hmrc.gov.uk/budget2009/furnished-hol-lets-1015.htm

The proposal seems just to abolish the deemed trade rule which applies for certain income tax and CGT purposes. The IHT legislation does not have any specific rule for FHLs, and BPR just depends on whether it amounts to a 'business' or not. HMRC's view is that to amount to a business, you need to be doing more than just renting out a cottage - you need to be laying on activities too.

Re AIM - I completely agree with AA. Plus, remember that not all AIM shares qualify. The company must qualify as a trading company. Also, some shares that are listed on AIM also have full listings on other exchanges (eg in Europe). If it has a full listing elsewhere, it will not be BPR-able. We are dealing with a huge negligence case when someone advised investing in just such an AIM company, unaware of the fact it was listed on the Euro market!

AK

by **marc02** on Fri May 22, 2009 3:41 pm

The risk for AIM is high. I have tried to be creative to think of other safer places to put the released equity money, but wanted to check if these would qualify for the same benefits:

1. Ltd company holding precious metals such as gold or diamonds

2. Services company (may be property management company), which purchases a commercial premises to work out of.

3. Any other ideas….?

Thanks