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Legal & Finance: Inheriting a growing problem.

Byline: By John Cranage

Inheritance tax has become the godfather of all stealth taxes over the past eight years as rising house values have dragged millions of homeowners over the pounds 275,000 threshold.

It is boosting the Treasury's coffers by siphoning off wealth that would otherwise be passed down to future generations.

So it's not surprising that planning to minimise the impact has become big business for tax lawyers and financial advisers.

Despite that, it seems surprising that one route open to those who want to exercise their right to arrange their affairs in such a way as to ensure the taxman gets as little of their wealth as possible when they die should involve investing in shares.

Shares in companies invested in the junior Alternative Investment Market, which carry a higher degree of risk than those traded on the main London stock market, to boot.

That, however, is what a specialist team based at private client stockbroker Brewin Dolphin Securities' Birmingham office is doing - with, it seems, a fair degree of success.

The vehicle they use is called an inheritance tax relief portfolio management service and it comes with two important benefits.

First, investments held for a minimum of two years carry 100 per cent relief from IHT via the business property relief rules.

Second, profits from the sale of qualifying shares held for two years or more incurs only ten per cent capital gains tax.

Brewin Dolphin director Martin Ennis explained: "Traditional IHT measures involve insurance products or trusts.

"This does not use either but it does offer 100 per cent relief from IHT. And because we are not creating trusts, there are no legal restrictions or medicals to pass and people can take their money out at any time.

"It utilises business property relief legislation and is tried and tested. This not something that has just been dreamt up.

"Because it is a shares portfolio, customers can get their money back at any time."

Anyone with a minimum pounds 30,000 to invest can sign up for the Brewin Dolphin scheme, which invests in carefully selected qualifying AIM-quoted shares (financial services and property companies are among those excluded).

Stephen Williams, the Birmingham-based head of the firm's specialist portfolios division, aims to reduce exposure to risk to a minimum.

AIM is not the wild west, however. Since it was launched in 1995, the second tier market has attracted more than 1,300 quoted companies with a combined market capitalisation of about pounds 48 billion.

It has raised more than pounds 19 billion of finance for entrepreneurial businesses attracted by the more relaxed entry qualifications and lighter regulation. More than 100 AIM companies, however, have graduated to the main market.

Mr Williams, who has 25 years' experience of investing in smaller companies, has whittled the 1,300 AIM listed companies down to a portfolio of about 20, less than two per cent of the total.

"We aim to invest in the best of the best and so we reject about 98 per cent of companies. The ones we are left with ought to be solid enough to give people the confidence to invest," he said.

The object, as Mr Ennis puts it, is "not to shoot the lights out" but to achieve a steady return of between five and ten per cent a year.

That means investing in companies that are helping to drive UK economic growth by generating strong profits or benefiting from government and consumer spending.

Among the investment criteria used by Mr Williams and his team is the little known Z-score, an analysis device used by ratings agencies to determine a company's credit-worthiness.

Mr Williams said Z-scores have a 75 per cent success rate in identifying companies in danger of going bust.

Pitching a riskier than average investment at a traditionally risk averse section of the population should in theory be a non-starter.

But Brewin Dolphin's figures prove otherwise. The inheritance tax relief fund, which has been going since October 2001, has signed up more than 300 investors and has funds of about pounds 35 million under management.

Its clients have an average age of 79 and the average investment is pounds 75,000.

The firm is reluctant to publish exact investment returns, but it does claim to "significantly outperform" the AIM market.

Mr Ennis said: "It is true that old people are risk averse, but many have left their inheritance tax planning until late in life.

"They have missed the boat in terms of having to take medicals for insurance-based schemes, but at the same time they don't want to give money away."


Stephen Williams
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Jan 6, 2006
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