Investing in AIM shares hit the headlines earlier this year when they became permitted investments within Isas, but perhaps less well known is the fact they can also be used for inheritance tax-planning purposes.
Under the umbrella of business property relief (BPR) holding shares in an unquoted company can qualify for 100 per cent tax relief, providing they are owned for at least two years. For these purposes, companies listed on AIM are considered unquoted, even though they are technically listed on a stock exchange. However, as with most UK tax regulations, it is not that straightforward.
Jonathan Gain, chief executive of Stellar Asset Management, explains: “Not all companies on AIM will qualify. There are a number of foreign-owned resources and mining companies which are managed and controlled in far flung places that are not necessarily EU managed or domiciled, so those types of companies won’t qualify.”
That said, he points out this still leaves the investor looking to mitigate their IHT liability with more than 1,000 companies to choose from that have a UK presence or UK activity, which means they qualify for BPR. Marilyn McKeever, associate director in the private client practice at Berwin Leighton Paisner, adds: “Shares in unquoted trading companies are, broadly, exempt from inheritance tax. An individual can give such shares to a trust without the 20 per cent entry charge and for as long as the trustees hold the shares, the trust will escape the periodic and ‘exit’ charges.”
But Paul Thompson, tax and estate planning consultant at Canada Life, adds that they can be quite volatile and so won’t suit every investor’s risk profile.
Mr Gain agrees that the size of most of the companies on AIM are clearly not as substantial as say the FTSE 100-listed firms, but there are still some surprisingly large and well-known names such as Asos, Majestic Wine and Mulberry. “These are decent sized companies and are therefore set up to be managed well in good times and bad times and are much less volatile than much smaller companies.”
On the issue of whether AIM investments are more volatile, he points out that people looking to use AIM for IHT mitigation understand that it will be a more volatile investment. But that can be managed by having the portfolio discretionally managed and can therefore mitigate the volatility by having a broad spread of holdings.”
Other key points for using AIM shares as an IHT tool is to know which are the good companies and meet the management on a regular basis to understand what their plans are and to make a more informed buy or sell decision.
Investing in AIM shares for IHT purposes is an alternative way to both mitigate IHT and provide some extra returns. But with all investments, the key is due diligence and understanding the risks involved in investing in a much smaller market.
Nyree Stewart is deputy features editor at Investment Adviser
