Client story: protecting a family’s wealth beyond retirement

Helping your clients to reduce their inheritance tax (IHT) bills means they can pass on more of their wealth to the next generation. Working closely with you and your clients, our financial planners can develop solutions suited to their circumstances to reduce their IHT liabilities as part of their retirement planning.

IHT planning in action: James’ story 

Here’s a recent example. James and his family were winding up a long-standing family business in which he was a shareholder. James didn’t require the proceeds (he was entitled to £700,000) of the business for his retirement due to his other sources of wealth and a final salary pension from a previous employment. James wanted to take advice as to what to do with the funds – his main priority was to be as tax efficient as possible.  

The shares James owned had an effective cost price of £0, so if they were sold for £700,000, they would result in a 20% capital gains tax (CGT) liability of £140,000 (based on 2023/24 rates). The £560,000 he would receive after CGT would have then joined the rest of his estate and been taxed at 40% on his death (based on James’ individual circumstances). This meant that after CGT and IHT, his estate would have been left with just £336,000 from the original £700,000.  

For the benefit of his family, James was understandably keen to avoid this and approached us for advice.  

Finding the right solution 

After reviewing his circumstances, we agreed that James had a high capacity for loss with these funds and he’d informed us that he was prepared to take a high level of investment risk with these proceeds.  

We recommended that James invest the proceeds of the sale of the business into an AIM Enterprise Investment Scheme (EIS) portfolio. By doing so, he would be able to: 

• Defer the capital gain to a future date. This meant that if he was still holding the shares when he died, the capital gain would disappear entirely, saving his estate £140,000. (Note: If he sold the shares prior to death, he’d be liable for CGT on the whole gain, calculated at the applicable rate in the tax year in which the chargeable event happens).  
• Reclaim income tax relief of up to 30% for the AIM EIS investment. With careful capital deployment that straddled two tax years, James could reclaim up to three tax years’ worth of income tax liability from HMRC, amounting to £180,000 (based on 2023/24 rates). It should be noted that this income tax relief is lost if the minimum holding period of 3 years is not reached with the EIS investments.  
• Reduce his IHT liability. Provided James held the AIM EIS portfolio for at least two years, 100% of the value of the portfolio would be free of inheritance tax. At a rate of 40%, this would save the estate £280,000, assuming no investment growth.  

By following our advice and investing the £700,000 in an AIM EIS portfolio, James could potentially benefit from £600,000 in tax savings and reliefs, allowing him to retain more of his wealth and pass on more of it to his family. What’s more, this portfolio would bring a better balance of investment risk to complement his existing investment portfolio and guaranteed pension income. 

It’s important to note that an AIM EIS portfolio is only suitable for people who are comfortable holding high-risk investments. This is because EIS invests in smaller, fledgling companies that are inherently likely to be more fragile enterprises and could fail. 

Another risk to consider is the illiquid nature of the investments as they are harder to sell than mainstream investments such as listed shares or unit trusts. As a result, EIS is considered to be high risk and will normally only be suitable for a relatively small proportion of a client’s overall portfolio.  

Finally, tax rules can change, and tax benefits depend on individual circumstances.