Mark McLaughlin looks at AIM-listed shares as a potentially IHT-efficient investment for individuals.
Many individuals concerned about exposure to a potential inheritance tax (IHT) liability on their estate would probably welcome an IHT-efficient investment such as a business interest or shares in an unquoted trading company, which are eligible for business property relief (BPR) at 100% if certain conditions are satisfied.
Of course, not everyone has their own business or (say) shares in an owner-managed or family company. However, it is still possible to access BPR, such as by investing in someone else’s business (e.g., shares in a friend’s trading company). Another possibility of using BPR as an IHT shelter is by investing in company shares listed on the alternative investment market (AIM).
AIM shares and BPR
A business (or business interest) or unquoted company shares are broadly eligible for BPR unless the business (or the business carried on by the company) consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments (IHTA 1984, s 105(3)). ‘Unquoted shares’ are defined as shares not listed on a recognised stock exchange. However, shares that are listed but only on the AIM are regarded as unquoted for BPR purposes.
The AIM is a sub-market of the London Stock Exchange (LSE); it is designed to help smaller (and therefore generally riskier) companies access capital from the public market in a more flexible regulatory environment than the LSE. Shares traded on the AIM qualify for BPR once the investor has owned the shares for at least the preceding two years. Several financial services providers (e.g., Octopus Investments, Investec) offer AIM portfolio plans, which help to spread the inherent risk.
AIM planning
An AIM share portfolio plan may be attractive for IHT purposes in various ways. For example, it can be used by individuals who wish to save IHT at 40% on their death estate but are elderly or ill and do not realistically expect to survive the seven-year period necessary for a ‘potentially exempt transfer’ to become exempt and reduce the value of their estate.
Alternatively, AIM-listed shares could be used in lifetime IHT planning, such as buying AIM shares and settling them on a discretionary trust for family members after two years. This may be particularly helpful if (for example) the individual recently used their IHT nil rate band (£325,000 for 2023/24) but wished to make further chargeable lifetime transfers without triggering an immediate IHT charge at 20% (and possibly further IHT on death).
AIM traps
Care is needed when considering investments in AIM-listed company shares. For example, not all AIM-listed shares qualify for BPR due to the nature of the company’s business activities. Furthermore, even if the company is undertaking the ‘right’ activities for BPR purposes when the investment was made, the company’s activities could subsequently change.
In addition, some AIM-listed companies have secondary listings (e.g., on foreign recognised stock exchanges), which may deprive the shares of BPR status.
It is therefore good practice to monitor the company regularly after the investment in AIM-listed shares has been made.
Practical tip
The ‘tax tail’ should never wag the ‘commercial dog’. AIM-listed companies tend to be smaller and more speculative in nature than shares listed on the LSE. Always take independent financial advice when considering such investments.
