Money moves: Take AIM against inheritance tax

An AIM portfolio can mitigate against IHT. Picture: Ian Rutherford
An AIM portfolio can mitigate against IHT. Picture: Ian Rutherford
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GIVEN that more than 50 per cent of the UK adult population has not made a will, it’s no surprise that estate planning or inheritance tax mitigation is often left until the very last minute.

If the value of your estate is above the threshold of £325,000 (or £650,000 for married couples/civil partnerships) the excess will be subject to inheritance tax (IHT) at 40 per cent.

The conventional approach when dealing with a potential IHT liability normally involves a combination of gifts and the setting up of various types of trusts. However, this can often prove to be a costly and time-consuming exercise and you may have to wait as long as seven years before an IHT charge can be avoided altogether. There is a strong possibility that you lose personal control of your investments when you assign them to a trust, which could present difficulties if your circumstances changed.

Recently, there has been an increase in AIM (Alternative Investment Market) portfolio investing for IHT planning. The main benefit of AIM investments is that they provide a more rapid solution than more traditional forms of IHT planning. AIM portfolios fall out of your estate for IHT purposes after only two years. AIM Investment also allows you to retain control of your assets at all times, you are able to make further contributions if you wish, and you also have the possibility of making equity-type returns.

AIM was launched in June 1995 as the London Stock Exchange’s international market for smaller companies. AIM assists growing companies raise the capital they require for expansion with a relatively inexpensive and flexible method of acquiring a stock market listing.

The objective of an AIM portfolio is to invest in carefully-selected companies that qualify for Business Property Relief (BPR). BPR was introduced in 1976 and is a tax relief offered by the government as an incentive for investing in a trading business. Investors in unquoted shares of trading companies benefit from 100 per cent relief from inheritance tax, provided the shares are held for a minimum of two years and at the time of death.

It is important that the AIM portfolio manager constructs a well-balanced, diversified portfolio. Company research is key and it is important the companies are monitored on an ongoing basis to ensure BPR qualification. The relief is assessed on a case-by-case basis by HMRC following the death of the investor.

AIM stocks are potentially higher risk than most FTSE All-Share and FTSE 100 companies. However, it could also be argued that the 40 per cent IHT relief provides a substantial buffer against potential capital losses. There are some well-known companies listed on AIM, including ASOS and Majestic Wine, which can help to make a portfolio more defensive. Furthermore, a fully-diversified portfolio enables you to spread your risk across a range of sectors and companies, spreading the potential risk further.

There are a number of investment managers who construct and manage AIM portfolios, however it is important to carry out due diligence on these managers because their underlying performance can vary quite dramatically.

AIM portfolio investment may not suit everyone – the potential IHT benefits will depend on an individual’s circumstances. Potential investors should understand the risks involved. We recommend investors seek independent financial advice before making an investment to ensure that an AIM portfolio would suit their objectives and their attitude to risk.