Reducing Inheritance Tax by Investing in AIM Shares

By Abigail Ward, Trainee Investment Adviser, Charles Stanley AIM team

Outside of the tech-heavy US indices, AIM’s performance in 2020 outstripped other global benchmarks, achieving growth of c.22%, according to data from Thomson Reuters.  Since the early days of AIM, it has transformed and matured; currently there are approximately 820 companies trading on AIM with a combined market cap of £107billion. Of these, over 240 companies have a market cap in excess of £100million. Many of AIM’s largest constituents would be part of the FTSE250 if listed on the main market. Some of the main attractions to investing in AIM are:

1. Tax Relief

Without taking the appropriate advice and measures, individuals who have amassed wealth over their lifetime may be at risk of not being able to pass on as much as they hoped to loved ones. 40% inheritance tax is payable on assets over an individual’s nil-rate bands.

Business relief is a statutory relief provided by the UK Government as a way of incentivising investing in specific types of trading companies – including many companies that are quoted on AIM. Once assets qualifying for business relief are held for a minimum of two years, they are exempt from inheritance tax (providing they are still held at the time of death). If the two-year holding period is not met, the surviving spouse or civil partner can inherit the portfolio without restarting the required holding period. 

2. Retain control

Various inheritance tax mitigating strategies involve relinquishing some degree of control and ownership of the assets; to many this feels uncomfortable and irreversible. When investing directly in AIM, an individual retains full control and has the ability to distribute the income generated, or liquidate part, or all, of the portfolio at any stage. Should their circumstances change there is no penalty for realising the portfolio, other than the normal transaction charges.

3. Speed

Currently, the qualifying period for business relief investments is just two years. Comparatively, a large gift would take seven years to be excluded from an estate for inheritance tax purposes.

4. ISAs

AIM shares can be purchased within an ISA. This makes AIM one of the most tax advantageous markets for investors, as the ISA would be free of income tax, capital gains tax and if held for the requisite two years – inheritance tax.

5. Power of Attorney 

A portfolio of AIM shares can be created under a Power of Attorney or Court Order. The investments would still be held in the beneficial owner’s name.

6. Simple

AIM portfolios are straightforward and do not involve some of the legal complexities of other inheritance tax mitigating tools – such as trusts.  The only structural difference between a regular stocks and shares account and an AIM portfolio is that an AIM portfolio holds AIM shares that will hopefully qualify for inheritance tax relief when the holder dies. 

The Charles Stanley AIM Service has a proven track record and was named ‘Best AIM Portfolio Service’ at the 2020 Growth Investor Awards.  The team invests in companies that have shown consistent and sustainable growth and have simple and scalable business models. The investments are selected by our dedicated AIM team, who have a long track record of generating returns from investing in AIM quoted companies. 

This service should be regarded as high risk because it is exclusively focused on smaller company shares. Share prices on AIM may be more volatile than those on the Official List of the London Stock Exchange and, at times, it may be difficult or impossible to sell such shares.

As this is only one of many tools that can be used to mitigate inheritance tax, Charles Stanley now require that clients seek financial advice, regarding their inheritance tax liability, before opening an AIM portfolio.  

For more information please contact the Charles Stanley inheritance tax team on 0207 149 6159 or by email abi.ward@charles-stanley.co.uk

The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority. Charles Stanley is not a tax adviser. Information contained in this article is based on our understanding of current HMRC legislation. Tax reliefs are those currently applying, and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future.