Are there investable AIM shares to manage inheritance tax?
Inheritance Tax (IHT) Planning
Business Property Relief (BPR)
This is a flexible way to mitigate inheritance tax costs and retain control of capital. Assets that qualify for BPR are disregarded for IHT purposes as long as shares have been held for longer than two years. If the investor dies within two years of making an investment, the portfolio will not benefit from BPR. However, if the investor has a surviving spouse then the assets may be transferred across without triggering an IHT liability, or restarting the two-year qualifying period.
What are AIM, NEX and Unquoted Shares?
One of the options for Business Property Relief is buying shares in the Alternative Investment Market (AIM) and ICAP Securities and Derivatives Exchange (NEX). These are designed to allow smaller companies to float shares more easily and cost effectively than the main market. This market does carry a high degree of risk for investments, so we would only recommend this to investors who fully understand all of the risks involved. Please see our Risks section for further information and explanation of the risks involved.
How does it work?
Investments that qualify are initially are included in the deceased’s estate for probate purposes and then revalued at the date of death to ascertain if they qualify for tax relief. If 100% Business Property Relief is available, the value of the securities will not attract death duties thus no Inheritance Tax will be payable on their value at the time of death.
The securities within an IHT portfolio must be deemed ‘unquoted’ – for taxation purposes. In this respect ‘unquoted’ means those which are not listed on a recognised stock exchange such as the London Stock Exchange. Shares listed on the AIM and NEX markets are considered ‘unquoted’ shares in this respect.
Additionally, the activities of the underlying business assets must also be employed in an on-going trade, which effectively excludes businesses, which trade in securities, land or buildings, or are involved in investment activities.
AIM – What you need to know
Do all AIM shares qualify for inheritance tax relief?
Not all AIM shares qualify for inheritance tax relief, though most will. Generally, property companies, finance companies or professional companies will not qualify for IHT relief.
Is an AIM portfolio risky?
These types of shares are considered high risk. We would probably disregard a significant proportion of the whole AIM/NEX and unquoted market as the risks are just too great. If you approach it in the right way you can find a few that are worth pursuing. The trick is having the experience to find the ones that could be plausible options.
What would you consider an investable AIM share?
We carry out thorough checks on each business that could be a potential investment. Firstly, we try to get to know the company and meet the management team on a site visit. We essentially go and kick the tyres of these businesses to see exactly what they are about.
We consider a number of additional factors such as the strength of the balance sheet, the ability to pay and increase dividends, the maturity of the business and the markets they operate in. We like to see the management with a large portion of their personal wealth committed to the business as this can imply they are more likely to look after shareholder value long term. This approach has often led towards investing in family run businesses.
In addition to this we like to see some assets, cash or property that gives some cover if the business gets into difficulty.
Having done all the research and due diligence things can still go wrong so you need 10-15 holdings to ensure you’re not over exposed to any particular stock.
If someone was thinking of an IHT portfolio what would you suggest?
Firstly, you would need to be assessed to see if you actually need one. An independent financial advisor or a tax advisor would do this, then a company like James Sharp would consider if you had sufficient knowledge and experience to understand the risks involved and that you were prepared to take the risks involved. Once that is considered you can get started, but it definitely isn’t something for everyone.
James Sharp & Co does not provide a discretionary or managed IHT portfolio service. Therefore, we are not responsible for assessing or reviewing the investments within a client's portfolio on a regular basis. This means that we will not proactively assess or review a client’s portfolio, only when a client asks for advice.
Investments in certain securities, including shares in smaller companies, companies in specialist sectors, and/or in unquoted companies, will normally involve greater risk or above average price movements (volatility) than investments in larger, more established companies. The markets in such companies can suffer from partial or total illiquidity, which can make it difficult, or impossible, to dispose of an investment. Past performance is not a guide to the future. Your capital is at risk and may fall as well as rise and the amount realised may be less than the original sum invested.
For quoted investments the difference between the Bid and the Offer price will often be greater, so that if an investor has to sell a holding immediately after purchase, the proceeds may be less than the initial amount invested. AIM quoted shares tend to have market quotes in relatively small lots of shares, so selling large quantities in the market may achieve a lower price than the market quote.
Many smaller companies have a small management team and as such the loss of any one individual may have a significant effect on their performance. In a similar vein, these companies are likely to have a limited product range and tight cash constraints and tend to be vulnerable to sudden changes in market conditions.
The rules for issuers whose shares are quoted on AIM are less demanding than those for the Official List of the London Stock Exchange; as such, the investment risks are higher. For unquoted companies the risks are much higher than for quoted companies; it may be difficult or impossible to sell such shares, or to assess their value or the level of risk involved.
It should be noted that the benefits of the Inheritance Tax Portfolio Service are premised on current tax rules continuing for the duration of an investor’s portfolio. The rules on tax or their interpretation, as with the rates of tax applicable, may alter. The details in this document are a simplified summary of the relevant tax rules.
James Sharp & Co is not a tax adviser and potential investors are recommended to consult a professional tax adviser on all tax matters. Nothing in this material constitutes investment advice, nor is it a substitute for investment advice, which should be obtained from an authorised investment professional. Any investment decision the recipient make should be based on an evaluation of that recipient’s financial circumstances, investment objectives, risk tolerance and other needs.