IHT Portfolios Explained

What is an IHT Portfolio?

An IHT portfolio is a managed portfolio of unquoted or AIM-listed companies that qualify for BPR. AIM portfolios can be held in an ISA.

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What are the main benefits of investing in an IHT portfolio? 

If you are happy to take on significant investment risk, the benefits include:

• Pass on more of your wealth free of IHT – shares in BPR-qualifying companies can benefit from 100% IHT relief.
  
• Speed – IHT relief kicks in after just two years. This compares favourably to other forms of estate planning. 
  
• Simplicity – investing in an IHT portfolio requires a simple transaction, similar to investing in other tax-efficient products. There are no eligibility criteria for income, health or age. Investors are, however, required to answer some questions about their investment knowledge and experience. 
  
• Control – your money is not locked away. Should your circumstances change or should you need access, you can make withdrawals. The amount you withdraw will no longer be IHT free, but what remains invested should be. 
  
• Professional management – the portfolio is managed by a professional team, which researches and selects the investee companies and monitors them to ensure they remain BPR qualifying. 
  

What are the main risks of investing in an IHT portfolio? 

• Your capital is at risk – your investment can fall as well as rise in value so you could get back less than you invest. In addition, because BPR-qualifying companies tend to be smaller and subject to less stringent checks than those quoted on the main London Stock Exchange, the risks are greater.
• IHT relief is not guaranteed – tax benefits depend on circumstances and tax rules can change. To benefit from IHT relief you must hold the investment for at least two years and on your death and the companies must maintain their qualifying status. The government may change the rules on BPR in future.
  
• Investments may be difficult to sell – shares in unlisted and AIM-listed companies are more illiquid than those quoted on the main London Stock Exchange, so they may be more difficult to sell. 
  
• Not for everyone – IHT portfolios are only for experienced investors, who fully understand and are happy with the benefits and risks. You should only invest if you can withstand loss of capital. 
  

What kind of companies do portfolios invest in?

This will be different depending on whether it’s an unquoted or AIM portfolio. 

AIM portfolios, as the name suggests, invest in AIM companies that qualify for BPR. AIM is a diverse index, comprising nearly 800 companies worth from around £450,000 to over £3.3 billion (March 2022). AIM IHT portfolio managers tend to focus on established, larger, mature businesses. They should be more resilient and deliver growth but can be volatile. 

When you invest in an AIM portfolio you acquire shares in the underlying companies.

Unquoted portfolios are different. When you invest, you typically invest in one or more companies run by the portfolio manager. Each company will typically concentrate and make investments in a particular sector. 

Popular sectors for unquoted portfolios are: 

• Property: this includes businesses that trade from freehold or long-leasehold premises. Examples are care homes, hotels, pubs and data centres.
  
• Renewables: this includes solar or wind farms and anaerobic digestion projects. These businesses tend to have relatively low running costs, together with largely predictable revenue streams from Government-backed subsidies and sale of renewable energy.
  
• Lending: the company may lend money to, rather than investing in, small businesses. Loans tend to be secured against the borrower’s assets or offer some other form of security. 
  

Irrespective of the sector, these investments tend to be defensive in nature and aim to produce steady earnings, although this is not guaranteed. 

How much can I invest?

There is no maximum. The minimum investment will vary depending on the provider, but it is typically in the region of £50,000.  

Could I take an income?

Unlike most other forms of IHT planning, when you invest in IHT portfolios you can take money out – even liquidate the whole portfolio. 

Most providers will facilitate withdrawals. It could be a one-off or regular withdrawals. 

Withdrawals are not normally classed as income, but as a capital gain: you sell some of your shares and withdraw the proceeds. This could save tax: withdrawals will usually be subject to capital gains rather than income tax.

It’s important to note though any withdrawals will reduce the amount you can expect to become IHT free. Moreover, the amount you withdraw will be part of your taxable estate again, unless you spend it. 

Please remember tax benefits depend on circumstances and tax rules can change. 

How do I claim the tax relief?

The executors of the will or administrators of the estate can claim Business Property Relief when they value the estate.

They may have to submit schedule IHT412 (Unlisted stocks and shares and control holdings) in addition to form IHT400 (Inheritance Tax account) and alongside any other forms the estate’s circumstances will require as part of the probate process. 

The IHT portfolio manager will typically send details of the investment along with an information pack to help with this. 

What happens to my IHT portfolio when I die?

There are three main options for the executors of the will or administrators of the estate:

1. The portfolio could be liquidated and any proceeds could be passed on to your beneficiaries. 
   
2. The portfolio could remain invested for the beneficiaries (and in the case of a spouse or civil partner, it does not reset the two-year clock for BPR) 
   
3. The portfolio could be liquidated and the proceeds used to pay any inheritance tax due on other assets, such as your home, directly to HMRC.
   

If you died within two years of the investment and the portfolio was liquidated, the proceeds could be subject to IHT. 

What returns could IHT portfolios offer?

Most IHT portfolios target returns that aim to beat inflation – typically around 3% a year. Please note, returns are not guaranteed and capital is at risk.  

What are the charges?

An inheritance tax portfolio will have an initial charge (they vary widely from zero to 5.5%) and an annual management fee (typically in the region of 2% plus VAT). 

Some providers may also apply performance fees and other charges. Please read the provider documents for full details of the charges. 

Who might consider investing in IHT portfolios?

IHT portfolios are for experienced investors whose estates are large enough to be affected by inheritance tax and who want to keep control of their assets. They must be comfortable with taking significant investment risks. The type of portfolio chosen depends on many factors, including attitude to risk and whether income is needed. If in doubt, always seek professional advice.

Can I sell my inheritance tax portfolio?

One of the main advantages of investing in IHT portfolios over other IHT-planning strategies is the degree of control you can retain. For instance, if your circumstances were to change, it is possible to request the funds. Of course, in this case, you would however lose the IHT relief.