Techzone

AIM shares are increasingly attracting investors wishing to minimise their IHT bill, particularly now that such shares can be held within an ISA wrapper.

It's not difficult to see why.The AIM solution to the IHT problem is, on the face of it, a no brainer. It offers an escape route from IHT after only two years, without having to give anything away.

Too good to be true? Maybe. It's unlikely to be a solution for everyone. But for those who can take on the various risks and volatility that could be encountered along the way, it may be worth consideration.

IHT benefits of AIM

AIM shares are those listed on the Alternative Investment Market and tend to be smaller companies than those listed on the main markets.

Investing in AIM shares should be viewed on the spectrum of options for IHT planning further on from the more recognised solutions such as trust based plans.

The mechanics are relatively simple. It's just a matter of investing in an unquoted company that qualifies for business property relief (BPR) - broadly a trading company and not an investment company. No trust wording or underwriting is required. Once the shares have been owned for two years they will qualify for BPR at 100%, assuming this remains the position at the time of death. And as the shares will still belong to your client, they have ultimate control and access - dividends will be theirs, and they can dip into the capital anytime they want.

Conventional IHT planning involving gifts is still likely to remain the bedrock for anyone wishing to reduce their IHT bill and so maximising their family’s inheritance. Of course, an IHT strategy involving gifts typically requires the donor to survive for seven years from the date of the gift to be outside the estate. And if the control and flexibility of discretionary trusts is desired then the amount that can be given away without facing an immediate 20% may be limited to the nil rate band. This can generally be managed if the planning is done in good time and the gifting isn’t left until too late.

But some larger estates may benefit from AIM investing as a complement to conventional gifting; using AIM portfolios after they've already gifted more than their nil rate band into trust.

However, not every client will be comfortable with giving away assets in case they may need them in the future. And this may be where AIM portfolios appear attractive - IHT free after two years and access is retained. But if they're unwilling to risk giving away assets, they may also be unwilling to accept the level of investment risk posed by AIM shares.

And remember, there are some tried and tested trust estate planning solutions, such as loan trusts and discounted gift trusts, where some access or regular payments can be maintained.

Certainty is key consideration for many clients. If they survive for seven years, they know that any gifts will be outside of their estate. But what about the AIM option?   

The risks

Perhaps the most obvious risk is investment performance. Companies listed on the AIM are inherently smaller businesses than those listed on the main markets. Some of these companies may indeed be start-ups looking for backers. Inevitably this can lead to a greater degree of risk to capital than larger quoted companies and a more volatile performance.

Secondly, although the shares belong to your client, should they need to dip into this pot, they may not be able to sell them instantly. They may even have to accept a lower price than the real value of the company in order to sell.

Thirdly, it's important to remember that it's the BPR status of asset on death that matters, not when the investment is made. The status of the business may change, which could result in a loss of BPR. It may be taken over or merge with a fully listed company. Or the business may reach the stage where it wishes to apply for a full listing on the main market. Clients need to be on the ball in these situations, as BPR can only be retained if the shares are sold before a takeover and the same proceeds re-invested in another qualifying company.

It's also possible that the nature of the business may change and the company is no longer eligible for BPR. HMRC will assess BPR qualification on the death of an investor on a case by case basis. The deceased’s executors will have to provide the relevant information on form IHT400 and its supplementary pages to allow this.

Finally, there's always a possibility of a change to the tax rules. BPR was introduced in 1976 to make sure that succession planning for family businesses wasn't hampered by large IHT bills. Investing in AIM shares to secure BPR for investors who have no emotional attachment to the business may seem far removed from the original purpose and possibly expose this as an area for future legislative change. While there doesn’t appear to be any immediate plans to remove BPR from AIM listed shares, clients do need to consider the long term view. It's the availability of BPR on their shares at the time of death that's important, which could be many years from now.

Other benefits available to AIM investors

AIM shares are no different to fully listed shares in that they may be subject to income tax on dividends and capital gains tax on growth. But there are two ways of protecting clients from these taxes too, while still benefiting from IHT relief:

• Invest via an ISA. If a client buys AIM shares with their ISA savings, income and gains will be sheltered from tax. And BPR can still be claimed on the shares to keep them free from IHT.
• Subscribe for shares through the Enterprise Investment Scheme (EIS). While any dividends will be taxable in the normal way, up front income tax relief can be claimed on the amount invested. Capital gains made on the shares purchased will also be tax free. These reliefs come with certain conditions, principally that the shares must be held for at least three years.

Summary

Receipts from IHT have almost doubled over the last seven years, bringing £5.2bn into the Exchequer in 2017/18*. Clients will be open to acceptable ways of reducing their personal IHT liabilities.

Gifting will remain central to IHT planning, whether gifts are direct to the recipient or into trust for them. Alongside this, investment in AIM shares maybe an appropriate way to reduce a potential IHT bill, but so is losing all your investment from a small company that goes under - so clients have to understand the risks involved.

* Source: HMRC - Inheritance tax: analysis of receipts