Kicking IHT into touch

David Glick, director of Edge Investment Management, says investing in the glamorous world of football transfers is a new way of mitigating inheritance tax liabilities.

If, as Benjamin Franklin apparently said, the only things certain in life are death and taxes, the investment industry can at least claim to have 50% of the answer. Death – sadly none of us can do anything about, but as for taxes – and in particular, inheritance tax – there are a number of successful approaches.

At the risk of stating the obvious, with each year that passes we are all getting older, meaning that at some point the subject of inheritance tax (IHT) will rear its head.

IHT is no longer a tax on the super-rich. Interestingly, HMRC figures suggest that in 2004/2005 some six million households were in the IHT net and that estates of under £500,000 (not taking into account the current frozen £325,000 tax free allowance) account for 71% of those paying it.

It is a problem made more complicated by the fact that while we all know death is coming, few of us, thankfully, know quite when.

The most obvious way to avoid inheritance tax is to gift the assets in question to someone else, normally a family member. But of course HMRC is wise to that. Current rules mean the person donating the asset must live for seven years for the recipient to incur no tax on the gift. Should someone not live for seven years there is a sliding scale whereby HMRC claws back more of the gift the shorter the time between it being given and the death of the donor, which is all rather distressing. For example, if the donor were to live between four and five years under a standard scheme the tax is only reduced to 24% of the value of the gift.

However, there is a tax allowance called business property relief (BPR) under which assets can become free of IHT after just two years. In most cases products based on BPR invest in AIM listed shares or Enterprise Investment Schemes, but now there is a new entrant with an eye-catching twist – it is based on the high-glamour, high-stakes business of football transfers.

Debt factoring

In truth, beyond the headlines, and as befits a product in the sober business of inheritance tax planning, the scheme is based on the considerably less glamorous business of debt factoring.

Football clubs rarely receive the full amount of transfer fees upfront, with many millions of pounds typically being paid in stages over two or more years. However, clubs often want the full transfer fee immediately, to cash-flow their own player acquisitions.

The factoring company effectively buys from the selling club the right to receive the stage payments of the transfer fee and takes on the obligations of invoicing and collecting those payments.

These deals are made more attractive because under Premier League and Football League rules, if a club defaults on a transfer fee, the leagues can cover the debt by deducting it from the payments due to the club from TV and sponsorship deals, which run to many millions of pounds each year.

Combine that protection with the business property relief benefits of exemption from inheritance tax after just two years, together with the flexibility to top up or reduce investments without having to start the clock again for relief, and the HMRC seven-year rule no longer looks so daunting.

The Edge Inheritance Tax Service fund is targeting a 3% annual return to investors, and if the amount invested has not been preserved in full over the first two years, the fund will make good the shortfall, up to 3% of the capital value of the investment in the factoring company.

For the third year and each subsequent year for as long as the investment is held, if investors do not earn at least 3% per annum on the full amount invested, the fund will contribute an amount up to 3% per annum of the capital value of the investment.

Roy Jenkins, a former Labour chancellor of the exchequer, once said that: “Inheritance tax is a voluntary levy (sic) paid by those who distrust their heirs more than they dislike the Inland Revenue.”

While this might be considered a rather cynical point of view in the current economic climate the fact is house prices are now almost out of reach for first time buyers and they are looking to their parents/grandparents to assist them in buying their first home, especially with the tightened lending criteria which increasingly hold sway.

On this basis the funds within a family need to be maximised more than ever. Pensions are paying a reduced monthly income, stock markets are currently stagnating, and taxation and increases in the cost of living are reducing people’s ability to maintain their standard of living.

This is all contributes to a situation where the last thing anyone needs is for a family’s wealth to be reduced on death by a further 40% – especially given the amount of tax already paid to accumulate that wealth in the first place.

Eye on the tax deadline

With the end of the tax year fast approaching, the attention of investors and their advisers is inevitably on those products with an April 5th deadline. Typically ISAs, VCTs and PEPs will attract the most attention.

But it is worth remembering while each of these products offers an escape from tax rolling up gross, none of them are exempt from inheritance tax.

For many people inheritance tax may be the biggest single tax bill they ever face. Inheritance tax products may not offer the “easy” sell of an annual deadline, but they are based on the ultimate deadline of all – death itself.

And with various BPR based schemes now available while advisers and their clients may not be able to escape death, they might as well kick this most swingeing of taxes into touch.