How investments in AIM-listed companies could help you reduce your Inheritance Tax bill

Inheritance Tax (IHT) is one of the steepest taxes you might face, charged at 40% on the value of your estate above the nil-rate bands (up to £500,000 in 2022/23).

And even worse, paying the bill will be left to your family if you don’t make preparations for what will happen on your death.

That’s why it’s fully understandable that you might want to look for methods to limit the bill your loved ones will face when you pass away.

Indeed, you may have read our previous blog in which we described five useful methods that can help you reduce a potential IHT liability.

When we discussed Business Relief in that blog, we briefly mentioned that investments in companies listed on the Alternative Investment Market (AIM) are also eligible for IHT relief.

This could certainly be a viable option for you. However, there are rules you’ll have to meet to use this method, and there are also a couple of significant drawbacks you’ll need to bear in mind before you invest.

So, find out what AIM-listed companies are, how they can reduce an IHT bill on your estate, and the risks you should keep in mind before you invest.

Investing in less-established companies

Introduced in 1995 to replace the Unlisted Securities Market, the AIM is a sub-market of the London Stock Exchange (LSE). You may see the AIM referred to as the “junior market” of the LSE.

It is made up of smaller, less-established companies that want to attract investment from individual investors but don’t meet the criteria to be listed on a larger market such as the LSE.

In general, these are early-stage, high-growth businesses. This means you could potentially be making a “ground-floor” investment in a company that will become an integral part of the UK’s financial landscape.

Conversely, these companies tend to be smaller and more volatile. As a result, they often have a greater rate of failure, potentially meaning you could lose your entire investment.

AIM investments can come with valuable IHT benefits

The UK government is often keen to promote growth in early-stage businesses. So, as an incentive to take on the additional risk involved with these smaller companies, the government offers Business Relief on many AIM investments.

Shares in an unlisted company are eligible for 100% IHT Business Relief. For these purposes, shares in AIM-listed companies are treated as unlisted.

That means your beneficiaries can inherit these investments from you without any of the value being included in your estate.

This can be a useful alternative to other methods of reducing IHT as it allows you to retain control over your investments, rather than surrendering part of your wealth as you may have to do when making gifts or using trusts.

You can now hold AIM investments in an ISA, too. So, as well as being free from IHT on your death, you’ll also be able to shield your investment from Income Tax and Capital Gains Tax (CGT).

There are rules to bear in mind with AIM investments and IHT

Of course, as with Business Relief, there are some conditions you’ll have to meet in order to qualify for these IHT benefits.

Firstly, unlike some other aspects of Business Relief, you must be holding the AIM investments at the time of your death to qualify for tax relief. That means you must pass them on as part of your will, not while you’re still alive.

Additionally, you’ll have to own your investments for at least two years before your death. This prevents individuals from converting their entire portfolios into AIM stocks shortly before they pass away to avoid an IHT bill.

If you die before having held your investments for two years, you can pass them to your spouse or civil partner to hold IHT-free without the clock resetting on the holding period.

So, for example, if you died 18 months after making an AIM investment, your spouse or civil partner would only need to hold them for another six months to meet the two-year criteria.

AIM companies can come with potential drawbacks

While the IHT benefits of AIM-listed companies can make investments in them seem attractive, there are a couple of hefty downsides that you may want to keep in mind.

You’ll be taking on additional risk

Firstly, as alluded to above, AIM companies tend to be less established, and so may involve taking on additional risk with your money.

You could experience greater volatility in the value of the company, with your investment rising and falling more than investments in traditional options might.

There’s also an increased risk of the company failing, meaning you might lose your entire investment. This could ultimately see you pass on less of your wealth to your loved ones, regardless of an IHT bill.

As a result, you’ll need to be comfortable with the additional risk to your money.

AIM shares tend to be less liquid

The other downside of AIM shares is that they are typically less liquid.

It’s often more difficult to find a buyer for AIM shares, meaning you may be unable to access the value in your investment, even if it has risen since you first bought it.

Of course, if you’re holding the shares for IHT purposes, this may not matter to you. However, it may be more difficult for your beneficiaries to sell the shares and access the value once you pass away.

Think carefully about whether you need your money or whether you want your beneficiaries to be able to access it quickly before you commit to AIM investments.

Speak to us

Whether you’d like to discuss AIM investments to reduce your IHT liability, or you just want to check in on your retirement plan, we can help at Britannic Place.

Email or call 01905 419890 to speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

AIM investments can be high-risk and you may get back less than you invest.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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If you have any questions or queries, a member of the team will always be able to help. Feel free to use the form below or contact us via phone or email.