How inheritance tax is pushing families into high-risk investments

Inheritance tax fears are pushing families to risky investments which could end up costing them more than the divisive duty itself.

Sanjay Arora began putting his mother’s money into the Alternative Investment Market (Aim) in 2017, but has found the investments have not done as well as he expected.

He moved his mother’s wealth into shares on the junior stock market to benefit from tax breaks designed to boost investment in smaller British companies, saying there were fewer other “viable options” to sidestep the 40pc tax available.

Aim IHT Isa portfolios – which are managed by investment managers – are made up of certain shares which qualify for Business Property Relief. This means that after being held for two years, the value of any qualifying shares will be excluded from inheritance tax.

However, the Aim market is often volatile – returns can be meagre and the risks are high.

Mr Arora is a property developer in Berkshire, and has a portfolio of 29 buy-to-let properties. His mother, Kamla, is 85, and in poor health, and from 2017 he began moving £70,000 of her savings into two Aim IHT Isas with two separate investment managers through intermediary, Wealth Club.

Although one of the investment managers he uses offered his mother insurance policies to cover any losses during the two-year window, recent market turmoil in the market means his portfolio has only “broken even”.

He said: “When my mother’s health deteriorated, we decided to shift all the money in her cash Isas into a tax-free Isa.

“The Aim Isas have probably done OK – more or less – probably the same as a cash Isa would have performed.

“They have been quite volatile, though, and haven’t performed as well as we thought they would. But as part of the insurance policy, the investment manager arranged that if the investments went down in the first two years then they would cover the loss.

“The investment manager also offers to those aged under 85 an insurance policy which pays out a sum equivalent to 40pc of the investment if they do not survive two years.

“It’s luck of the draw, I suppose. But at least my mother hasn’t lost any money. So we probably have just about broken even – but either way, we are saving on inheritance tax.”

The Telegraph is campaigning to scrap the divisive 40pc death duty. More than 50 MPs including Liz Truss and Nadhim Zahawi have called on Prime Minister Rishi Sunak to abolish it.

Aim Isas are becoming increasingly popular for families of older savers that want to avoid paying the death tax, according to chartered financial planner at Quilter, Tracy Crookes.

“Using an Aim portfolio to reduce inheritance tax bills is an area in which I’m seeing increased levels of queries from clients,” she said.

However, Drew Nutsford, director at wealth manager Waverton, said Aim stocks were not suitable for older clients.

“Aim stock portfolios are unlikely to be suitable [for older savers trying to avoid tax] because of their potential price volatility and the shorter anticipated investment timeframe,” he said.

“Those with a higher risk appetite and a strong desire to minimise inheritance tax should consider alternative business relief qualifying solutions because they are efficient from an inheritance tax perspective without exhibiting the volatility attached to Aim stocks.”

The FTSE Aim 100 suffered badly last year. After seeing high returns in late-2020, the market collapsed last year to lows not seen since 2016, which had disastrous effects on investor portfolios.

Gary Jeffries, managing director of Panoramic Wealth, said many advisers and managers were recommending Aim stocks to people looking to avoid death duties as an “easy way out”.

He said: “Aim has been oversold, and clients often think they are just buying a normal portfolio. It’s very, very volatile and full of high-risk stocks.”

Former pensions minister, Steve Webb, said: “It would be a risky strategy to give a high allocation to this kind of investment, especially if you would be in a difficult position financially in the event of a market downturn, for example.

“ Any adviser – or sales person – who promotes investment in Aim shares for tax purposes should be very clear about the associated risks.”

Mr Arora said that the Government should abolish inheritance tax.

“I think inheritance tax is unfair. We all work hard for our money and if we want to pass it onto our children without our estate being reduced by 40pc.”

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