Despite the recent introduction of the new residence nil-rate band in 2017, Inheritance Tax revenue exceeded £5 billion for the first time in the UK, in the tax year 2017/2018. This highlighted that without putting appropriate arrangements in place, you are risking not passing on a large portion of your assets to your loved ones.
Inheritance Tax is often known as a “voluntary tax” as it is largely avoidable with suitable planning. One of the many options that can be used to mitigate Inheritance Tax is investing in shares listed on the Alternative Investment Market (AIM) that qualify for Business Relief. Once Business Relief qualifying assets are held for a minimum of two years, they are exempt from Inheritance Tax providing they are still held at the time of death. If the two-year holding period is not met, a surviving spouse or civil partner can inherit the portfolio without restarting the required holding period.
AIM is an interesting option, when Inheritance Tax (IHT) planning, for investors who are willing to take on the risk. Unlike many other IHT solutions, an investor can maintain control of their assets as the holdings remain in their name. AIM portfolios are also straightforward and do not involve some of the legal complexities of trusts. In addition, it can be an effective solution for an ISA. An AIM ISA is free from Capital Gains Tax, Income Tax on your dividends and has the potential to be free from Inheritance Tax. Investing in Business Relief qualifying assets is the only way to mitigate Inheritance Tax for your ISA.
The Alternative Investment Market
AIM was established in 1995 and is the London Stock Exchange’s market for smaller, growing companies. AIM’s regulatory structure is based around balancing the flexibility a growing company needs while offering appropriate investor protection. AIM has become attractive to a wide range of companies at different stages of development and covers a broad range of sectors, including a number of long-established companies.
Historically, AIM has been regarded as a market full of high risk, loss-making technology and resource companies that were caught out in the dotcom bubble and the financial crisis. However, over the course of the past decade, the number of stocks listed on AIM has reduced dramatically, while the total market capitalisation of the index is now almost £100bn. The average company on AIM is now capitalised at more than £100m.
Despite the rise in quality and size of the constituents listed on AIM, many of these companies still qualify for Business Relief and therefore gain exemption from Inheritance Tax (IHT). This is provided that the company is not listed on a Recognised Investment Exchange (RIE) and it is a trading entity. The result is that investors can invest in a number of companies of reasonable size and still save IHT for their beneficiaries as long as their AIM shares have been held for two years and are held at the date of death. For example, an investor could hold a company such as Fever-Tree, which currently has a market capitalisation of around £3 Billion, and after two years, benefit from 100 percent relief from any IHT due on that holding.
Who Would Typically Invest in an AIM Portfolio?
There are a wide range of clients who open AIM portfolios at Charles Stanley, but the one common theme is that they all have estates that are large enough to be affected by Inheritance Tax. It is recommended that clients speak to a professional to establish if this applies to them.
Often clients join the Charles Stanley AIM service when they have left their IHT planning to the last minute. Using AIM shares, that qualify for business relief and therefore can be outside the taxable estate in two years, can help as it is the fastest way to reduce a potential IHT liability. This means that many elderly clients come to us when they are not sure if they are going to live for seven years; which is the required period between a gift, to a beneficiary, and the donor’s death for it to be out of the taxable estate.
However, some investors open an AIM portfolio hoping that the holdings will rise in value over the long term, while also sheltering some assets from Inheritance Tax. These clients typically come to us in their early seventies and add to their portfolios as they age. Often these clients invest in AIM shares through their ISAs, which have remained relatively untouched for a number of years.
Our service has maintained a strong performance track record by investing in cash generative, established businesses. These companies need to have experienced and committed management teams who have a proven track record of successfully growing businesses. To find these potential holdings the team screen companies, looking for strong balance sheets, profitability and cash generation. The team then meet company management several times and often conduct site visits to fully understand the opportunities and risks in these businesses, before investing. This approach leads to the construction of portfolios that are diversified across multiple industry sectors, with strong companies that would hopefully survive in another economic downturn.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.