If you are elderly or you are terminally ill and you only have a short life expectancy then the planning opportunities for Inheritance Tax (IHT) mitigation are fairly limited. So what can you do about it?
Ultimately the simplest and easiest solution is to either gift assets that are free of Inheritance Tax such as gifts to charity or to maximise your Inheritance Tax reliefs and allowances.
Gifts between spouses or Civil Partners are free of Inheritance Tax but on the second death the widow/er’s estate becomes subject to IHT unless the assets themselves are free of IHT e.g. most pensions or the survivor’s estate is protected by Inheritance Tax exemptions and/or reliefs such as the £325,000 Nil Rate Band or the £175,000 Residence Nil Rate Band exemptions.
Another example is gifting some or all of your estate to charity. 100% of your charitable legacy is exempt from IHT. Believe it or not gifts to political parties are 100% exempt from IHT. I wonder why the government introduced that particular exemption?
There are also valuable exemptions for agriculture and business known as agricultural relief and business relief. For example if you have owned a farm or a trading business for at least two years those assets will usually be 100% exempt from IHT on your death! Quite remarkably generous in my opinion.
Interestingly a number of companies have created some very clever investments in recent years which take advantage of 100% business relief after just two years of ownership. Amongst the most popular of these schemes are AIM ISAs and Inheritance Tax Schemes or ITS schemes.
I just wanted to focus on ITS schemes for this blog and in particular the Puma Heritage Estate Planning Service or EPS.
What I like about Puma EPS is that your investment is into a finance company, Puma Property Finance, that lends money to property developers. In effect it operates like a bank. It lends a maximum of 60% of the property development, meaning there is always a margin of safety of 40%. That is a high level of equity. They have arranged lending of approximately £1 billion, across more than 500 individual loans, with no capital losses to date. That is a very impressive track record by any measure.
The reason why it qualifies for 100% business relief against Inheritance Tax is because you are investing in a private trading company which has been approved by HMRC as a qualifying investment.
Your investment becomes fully free of IHT on your death after two years’ of investment.
In return you receive 3.5% a year income.
The icing on the cake is that you can access your capital if you ever need it. So you can literally have your cake and eat it!
In my view this is an appropriate investment for someone with a relatively short life expectancy of, say, less than five years, someone who has surplus cash in a bank account earning minimal interest who has little, if any income needs, a person who has an above average attitude to investment risk and is motivated to save IHT.
So why do I think it is only appropriate for this type of person? Because the annual income is quite modest it is not suitable for someone with a long life expectancy because what you would gain in Inheritance Tax savings you would lose in lowish investment returns. That’s why.
It does not qualify for protection under the Financial Ombudsman’s Investor Compensation Scheme. Also as the company is a smaller one it is considered higher risk. If you die less than two years after investing in it, you do not benefit from the IHT saving.
On the other hand the company does retain a lot of security with a first charge on the property developments it is funding and it is only lending 60%. It has never experienced a loss on any of its loans to date. It is backed by its parent company.
The icing on the cake is that they offer a life insurance policy for a two year term which will pay your estate 40% of the investment cost, equivalent to the IHT payable, if you were to die within two years of investing.
By the way there are other similar IHT mitigation schemes on the market meaning that if you wanted to spread your risk you could invest into more than one ITS scheme.
So overall I consider this to be a fantastic investment for the right type of person if you are serious about saving Inheritance Tax in a simple way and you accept the investment risk. You know it makes sense.*
*Tax planning is not regulated by the Financial Conduct Authority.
The value of your investment can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.
Wealth and Tax Management are not advertising the PUMA IHT scheme.