FOR PROFESSIONAL ADVISERS ONLY
Our Retail Operations Director, Peter Steele, has contributed the following article to the latest Intelligent Partnership BR Industry Update.
Caught between a rock and a hard place
Having a musical background, when I hear those words, I think of the Rolling Stones song of a similar name. However, on this occasion it is something that an adviser said to me the other day; specifically, his description of where he felt he found himself.
He had been reviewing a client’s portfolio that included an AIM portfolio that had lost 20% of its value over five years. (It had actually lost a bit more than that, but 20% is an easier figure to work with when relaying the story). His client’s £200k was now worth around £160k. This is ignoring the effect of any fees and charges. (That caveat applies throughout this article).
Whilst he had lost faith in that portfolio, he had put off transferring the money into something else in the hope that the portfolio would recover most if not all of what it had lost. He did not like the idea of crystallising the loss. (The proverbial rock).
However, if the client remains invested in the AIM portfolio beyond 5th April 2026, the portfolio will only qualify for 50% Business Relief upon that client’s passing and therefore the £160k would cause the estate to suffer £32k of inheritance tax. That would mean the £200k would be worth a net £128k to the beneficiaries. (The proverbial hard place).
The adviser wanted to chat through whether or not the client should transfer their money from the AIM portfolio into an unquoted BR investment.
Transferring the money into an unquoted BR investment
Whilst this does crystallise a loss, if the transfer is done before 6th April 2026 and the client also dies before that date, 100% relief should be available utilising Replacement Property Relief.
However, if the client dies after 5th April 2026 (and regardless of whether the transfer was done before that date or not), transferring the money to an unquoted BR would mean that the client would be invested in an asset that should qualify for 100% Business Relief (if within their £2.5m allowance) after two years of ownership. That’s worth repeating. Despite the potential for Replacement Property Relief, 100% relief would only be available after two years!
Why? Section 107(2) of the Inheritance Tax Act states that Replacement Property Relief “shall not exceed what it would have been had the replacement or any one or more of the replacements not been made”. Therefore, if the client dies after 5th April 2026 and their estate is relying on Replacement Property Relief, the rate that applies would be 50% (i.e. the rate that would have applied had the transfer not taken place). Once the new unquoted asset has been owned for two years, Replacement Property Relief is no longer needed, so 100% Business Relief applies thereafter.
Let’s assume for the moment that the client then lives for five years before passing away and their investment grows by 4% p.a. Their £160k is now nearly £195k (an increase of c. 22%). Being an unquoted BR investment, this should qualify for 100% Business Relief (if within their £2.5m allowance).
Why 4% p.a.? I’m aware of at least one BR investment that has achieved that every year for the last five years (I’ll let you guess which one) although, as we all know, past performance is not a guide to future returns.
What if the client stays invested in their AIM portfolio?
Obviously, leaving the money in the existing AIM portfolio does not crystallise a loss. However, as we’ve said, if the client dies after 5th April 2026, the portfolio would only get 50% Business Relief. Therefore, to match the £195k in the unquoted BR example above, the AIM portfolio would need to be worth just over £243k after five years before inheritance tax is deducted. To get £160k to £243k in 5 years requires a compound rate of c. 8.75% p.a. (i.e. growth of over 52% over the period).
Whilst past performance is no guide, do you know many AIM portfolios that have managed that over the last five years?
What to do? Ultimately, that’s between the adviser and his client. This was quite an extreme example and, certainly, not all AIM portfolios have lost more than 20% over five years.
It may depend on how confident they are that an unquoted BR investment will achieve 22% over a five-year period compared to how confident they are that an AIM portfolio will achieve 52% over the same period to effectively match the unquoted BR investment (once IHT has been paid).
Also, if more clients move out of AIM portfolios and demand for AIM shares reduces, what will happen to the value of the AIM portfolios that remain?
Whatever they decide, I wish them well. Hopefully, it’s not all “doom and gloom” – I don’t want to “paint it black”.
…I’ll find my coat!
Peter Steele
Retail Operations Director
Seneca Partners
Notice: Invested capital is at risk and you may lose money. Tax rules and regulations are subject to change and qualification will depend on personal circumstances. This article should not be interpreted as investment or tax advice.
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