In recent years, Inheritance Tax (IHT) has affected more and more families, largely due to rising house prices. IHT is payable at 40 per cent on the net assets of an estate where these exceed £325,000 – the current (2014/15 and 2015/16) nil-rate band. Investing in Alternative Investment Market (AIM) shares is one way of reducing the IHT liability on an estate.
The AIM was launched in 1995 as a flotation market for small companies. Over 1,300 companies are currently listed – generally smaller, youthful enterprises with potential for rapid growth. Putting money into these companies is generally regarded as a somewhat riskier undertaking than investing in more established companies.
Qualifying AIM shares offer much more generous IHT relief than some other assets as they are considered to be business property. If property is held as AIM shares in certain trading companies, for a period of at least two years, it becomes eligible for IHT ‘Business Relief' (BR) at 100 per cent and will fall out of the estate for IHT purposes. This relief is a relief by value – in other words, the shares are treated as having no value for IHT purposes. The HM Revenue and Customs website contains information on investments qualifying for BR and their tax treatment.
Some stockbrokers and asset managers now offer their clients investment portfolios based on AIM shares. These invest in a wide range of shares (typically around 60), which offers the investor the possibility of having an IHT-efficient portfolio and a spread of risk.
Not all AIM companies are eligible for BPR however. To qualify, a company must be a trading company carrying out the majority of its business in the UK. Businesses trading in land or securities, or receiving a substantial amount of income from letting property or land, are excluded. Also, it must not be listed on another recognised stock exchange. If a company qualified for IHT relief when the shares were bought, but was subsequently disqualified under these criteria, investors must reinvest their holdings into new qualifying shares within six months to retain the BR exemption.
AIM shares can be unpredictable. AIM companies are smaller, less established companies and the AIM has fewer investors than other stock markets so share prices can be volatile, rising or falling rapidly. Shares can sometimes lose more than 40 per cent of their value, thereby nullifying any IHT saving.
AIM investment is particularly attractive for older people since AIM assets are exempt from IHT after two years, compared with the seven years required before gifts that are ‘Potentially Exempt Transfers’ cease to carry an IHT liability. Investing in the AIM will suit financially secure people with other liquid capital who can invest widely enough to bear the risks involved. However, any investment decision should always be made with the benefit of professional advice.