Is AIM still true in the mitigation of IHT

Liam Goodbrand, investment director at Charlotte Square Investment Managers, asks if the ploy still plays post-Budget

For many families, Inheritance Tax (IHT) is an unavoidable reality that can significantly erode the wealth passed down to future generations.

With the current individual IHT threshold frozen until 2028 at £325,000 (£500,000 when including the residence nil-rate band), and combined with a tax rate of 40 per cent on anything above this amount, strategic tax planning is more critical than ever.

Qualifying investments on the Alternative Investment Market (AIM) have long been applied towards mitigating IHT liabilities through Business Relief (BR), but with new economic policies in play, does it still remain an attractive option? There is some concern that the changes to IHT on personal pensions, bringing them into the scope of IHT for the first time from April 2027, will lead to harsh tax treatment on funds saved for retirement and for the benefit of future generations.

A pension review is under way, but the financial pressures facing Chancellor Reeves make it seem unlikely that substantial rollback will be possible. In some cases, the changes have meant that clients are now facing an effective tax hit on their pension of around 90 per cent.

Provided the qualifying conditions are met, AIM investments can provide a powerful mechanism for reducing IHT liability while maintaining control over assets.

AIM is the junior market of the London Stock Exchange, designed to help smaller, growing companies raise capital. Qualifying AIM-listed companies are eligible for 50 per cent IHT reduction. This means that instead of losing 40 per cent of assets to taxation, families can pass down a much greater portion of their wealth to beneficiaries.

As an example, for every £100,000 invested in AIM as opposed to remaining in cash, an additional £20,000 can be passed on rather than be paid in tax.

Compared to other strategies, such as setting up trusts or gifting assets, AIM investments do not require individuals to relinquish ownership, offering greater financial flexibility.

Trusts, while effective, are facing increased regulatory complexity and, like gifting strategies, require individuals to survive seven years for full IHT relief.

In contrast, AIM shares become IHT-exempt after just two years, potentially offering a fast and relatively straightforward solution with no upper limit on the amount invested and no anniversary charges.

Already we are seeing clients re-investing into qualifying AIM shares, and doing so in an Individual Savings Account (ISA) where possible.

Ultimately, no single IHT planning strategy is suited to everyone and so a diversified approach may be the most prudent way to go.

As tax policies evolve, proactive planning and informed decision making will be key to preserving wealth for future generations. Interested in learning more about AIM? Get in touch with one of Charlotte Square Investment Managers’ specialists to discuss further.