| May 2006
Q:
Is it possible to borrow against investments held in an AIM Portfolio
plan? A woman aged 88 was widowed last year and inherited the family home.
It has now been sold for £560k and she is in a retirement home paid
for out of various widow's pensions.
She also has her own investments broadly equal to the nil rate band (NRB),
and first call on an NRB Trust set up under her late husband's will, so
is financially secure. She cannot get a discount in a discounted gift
trust scheme on account of her age, so is considering an AIM share portfolio
(life expectancy at 88 is around 4 years so this is well worth doing).
She would also like to gift the house sale proceeds to the adult children.
Could she borrow against an AIM portfolio to do this and would it be effective
for Inheritance Tax (IHT) mitigation? Will anyone write such a plan? Is
there any other way of achieving this end?
A:
Editor's Comments
This month's Tax Clinic topic from the TaxationWeb Forum concerns
IHT planning for an individual with a short life expectancy, i.e. an elderly
lady with a life expectancy which the questioner states is actuarially
less than the seven year period for a potentially exempt transfer (e.g.
a gift to another individual) to fall completely outside the IHT net.
Can anything be done?
The strategy suggested by the questioner involves investing in shares
listed on the Alternative Investment Market (AIM). The particular attraction
of shares in trading companies listed on AIM is that they can qualify
for IHT Business Property Relief (BPR) at 100 per cent, if certain conditions
are satisfied. These include a requirement that the shares must normally
be held for a minimum of two years.
A further planning aspect of the query below is borrowing funds, which
reduces the value of the individual's estate for IHT purposes. The
problem with borrowing funds secured against business property (e.g. AIM
shares, as the query suggests) is that it has the effect of reducing the
value of an asset on which BPR may be due. Consideration should be given
(if possible) to securing the loan against an asset qualifying for no
relief at all.
Selection of responses from contributors
Bob Fraser commented:
Since the Chancellor's most recent well considered and carefully researched
changes to interest in possession trusts announced in the budget, all
(to my knowledge) discounted gift trusts are currently suspended until
the Finance Act is granted Royal Assent and the life offices come up with
a new framework.
The AIM is thus is only viable option, as you say. I confess to being
a little confused as to why the lady would wish to borrow against an AIM
portfolio in order to gift the sale proceeds. Why not simply gift the
proceeds, since you say that she has a sufficiency of income and access
to capital.
Of course, if she did gift the proceeds, she would have to live seven
years, albeit with taper relief on the amount in excess of the nil rate
band starting after three whole years.
The questioner went on to explain the proposed strategy:
Gift of proceeds now is a PET expiring in 7 years time as you say, but
actuarially there is only a small likelihood she will live that long.
Invest proceeds in AIM portfolio, so full business asset relief after
only 2 years.
Loan against AIM portfolio so her children can have the money now as
a loan to them, repayable on her death out of the value of the portfolio
which they stand to inherit.
They would have to make good any fall in value but I didn't mention there
is also a life policy worth approximately £250,000 written in trust,
which would cover this unless the loss were greater than 40%. This means
they could use the money e.g. for purposes for which they might not be
able to raise a loan or mortgage in their own right.
I realise the children will probably have to pay a commercial interest
rate on the loan to them to avoid this itself being a gift, as annual
IHT exemptions will not be enough to cover it.
Bob Fraser responded:
It looks a bit circular to me. The loan is to be repaid by the children
on Mum's death, only for the children then to inherit it. It will be interesting
to see what the legal/accountancy view is. I think you could usefully
look more broadly than just the lady's own assets.
For example, it appears that she does not require all her capital, yet
she can draw on her husband's NRB trust. Are there any assets in this
trust that could be paid out to the children? Alternatively, since the
husband died last year, is there scope in his will for a deed of variation?
This looks more complex than a simple answer in this forum will resolve,
and I suggest that you look for more detailed advice from someone specialising
in this area (AIM + IHT).
The questioner replied:
Yes, good point. The house was owned as tenants in common so a Deed of
Variation could immediately settle half of it on the children.
If the NRB trust were also broken within two years this would pay out
a similar amount, leaving £280,000 of the proceeds instead to safeguard
her future, this could be put into an AIM portfolio if desired.
Is there a way of putting the growth in the non-AIM investments outside
her estate for IHT or have these schemes also been stopped by the Chancellor?
Response from Bob Fraser:
Yes, absolutely. Unlike DGTs, we remain content to continue with loan
trusts. These are arrangements in which the capital is lent to a trust,
with any growth being immediately out of the estate, but with the capital
being repayable on demand.
Loan trusts remain effective since the loan is not a gift for IHT. The
growth in the trust is unlikely to exceed the nil rate band within the
timescale you envisage, so exit charges are not likely to be an issue.
For tax simplicity, you may wish to use non income producing assets in
the trust.
The loan should preferably not be set up with withdrawals for the benefit
of the lender, since one then has to question how much growth will actually
accrue.
The questioner:
'"a Deed of Variation could immediately settle half of it
on the children" ... unfortunately this will I think also immediately
crystallise a 40% IHT liability which they were hoping to defer, I knew
there must have been a reason for not doing it in the first place!
The husband's Will Trust trustees already have powers to borrow so maybe
that is a route rather than setting up a completely new trust? His widow
is of course a beneficiary but from what you say about withdrawals that
would not be a bar. The underlying reason for keeping this trust going,
other things being equal, was to skip a generation if she does not in
the end need the funds.
So to summarise, if the NRB is lent to the trust the growth thereon can
be protected from IHT, which is useful, but we still need a mechanism
to protect the balance and enable the children to extract the money, back
to the idea of borrowing against an AIM portfolio?
Bob Fraser replied:
Yes, the Deed of Variation would raise an IHT liability if the beneficiaries
were other than the spouse AND the amount so varied exceeded the NRB.
I presume from what you say that the husband's will have already made
use of the NRB.
I still think that HMRC would see the borrowing against the AIM portfolio
as circular.
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