I’ve heard these words or similar so many times. As such, because it seems unfair, people look for ways to save Inheritance Tax (IHT). It’s a perfectly natural reaction. However, often the decisions people make are not clearly thought through. Has intelligent thinking been applied?
John had sold his business for a sum in excess of £10m. He was concerned about IHT. I said, why did you sell the business? You were making all the money you needed and then you converted an asset that benefited from Business Relief to cash. In simple terms, your potential IHT liability has now increased by £4m. His accountants and advisers recommended investing into various IHT planning schemes. These included various trusts and specialist AIM investments. Whilst some of the trust and AIM can be changed as John still has control, but clearly, he cannot ‘unsell’ his business.
So what could have John done?
There are various reasons people sell businesses, and if you can sell your business at a time when you want to spend less time at work, the draw of a cash sale can be too tempting. Yet, John could have instead employed a CEO. He could have met once each month. His income was more than sufficient to meet his lifestyle needs for all his family. Neither would he have to find ways to save a potential increase in his IHT liability by £4m. In fact, the effort involved trying to understand various tax planning schemes is massive. Most entrepreneurs are not tax specialists, so they have to choose wisely tax advice, which is never simple.
It’s not that you don’t sell, its if you do, think through the consequences very carefully. Are you attracted to a better lifestyle or are you trying to get away from your existing lifestyle? Be clear about your desires and motivations. However tempting the sale of a business may be, write down why you are selling and what plans do you have for your future. Failing to do so can mean you are less in control that you have been to date.
And if you’ve decided to sell like John, what do you do with the proceeds? He invested into a scheme that aims to achieve 3% return. The sales presentation is easy. You save 40% and we aim to make you 3%. It’s a win-win for everyone. At face value, that appears attractive. But is it? Firstly, John has not saved 40%. You only save 40% if you die. Therefore, you have the potential to save 40% tomorrow. Yet a lot can change over time. Imagine you could make 7% instead of 3%. In 15 years, you could pay IHT and still have more left over than using these schemes. Moreover, you have access and control. Accepting a lower return just to save a potential tax is not that clever.
What about Johns AIM portfolio? The sales pitch is great. After 2 years, you can save 40%. The downside is that you need to remain invested in AIM stock to benefit. What if you live 15, 20 or 30+ years, does the AIM portfolio then make sense. Unlikely.
So why do people buy these products?
The tax tail wags the investment dog. The feeling of significant savings can cloud good decision-making.
As already mentioned, if you feel that IHT is excessive, you will be driven to find a solution. Sometimes the solutions may work, but they may not be right for you. If you are in the mindset of saving tax, its easier for those promoting their schemes to persuade you to buy. That’s because whoever is doing the selling makes money on your money. If you are not sure how these schemes really work and you can’t measure performance; if in doubt, do nowt!
The moral of the story is if you have a large IHT liability, take time and apply intelligent thinking to navigate a route that really makes sense. Whilst many schemes at face value look attractive; they may not be attractive in your circumstances. If you are motivated to save IHT, you will look for reasons to buy rather than reasons not to. It means your feelings can outweigh logic. Over time, the feelings change, but logic remains.
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