Inheritance tax: AIM is still saving the children
Historically, AIM has been regarded as a market full of high risk, loss-making technology and resource companies that were caught out in the dotcom bubble and the financial crisis. However, over the course of the past decade the number of stocks listed on AIM has reduced dramatically, while the total market capitalisation of the index is now more than £100bn. This means that the average company on AIM is now capitalised at more than £100m.
Despite the rise in quality and size of the constituents listed on AIM, many of these companies still qualify for Business Relief from Inheritance Tax (IHT). This is provided that the company is not listed on a Recognised Investment Exchange (RIE) when the investor dies and it is a trading entity. This means that investors can invest in some companies of reasonable size and still save IHT for their beneficiaries as long as their AIM shares are held for two years and at time of death (and of course, continue to qualify). An investor could hold a company such as ASOS, which currently has a larger market capitalisation than M&S and, after two years, benefit from 100% relief from any IHT due on those holdings.
New rules ahead?
This change in quality and size has led to speculation that there could be adjustments to the current AIM Business Relief rules. Investors were nervous ahead of the November budget, particularly as the government had ordered the “Patient Capital Review” earlier in the year, which was considering how to support smaller innovative companies with access to finance going forward.
Business Relief was not mentioned directly by Chancellor Philip Hammond, as he chose to focus on changing EIS relief and imposing a “capital preservation test” on EIS and VCT investments.
The consultation response, however, noted that the relief played a valuable role in preventing the breakup of otherwise viable businesses purely in order to meet IHT liabilities. The government noted it will keep Business Relief under review, but said it remained committed to protecting the important role that this tax relief plays in supporting family-owned businesses, and growth investment in the AIM and other growth markets.
We therefore believe that investing in AIM will pass any “capital preservation test” as an investor’s capital is very much at risk when investing in these relatively smaller and less-liquid companies. We therefore conclude that Business Relief rules on AIM are unlikely to change, in the short term, while this government remains in place. In addition, we think that it would be unlikely that a government would retrospectively remove these reliefs for investors who have already started holding AIM shares.
AIM remains an interesting option, when IHT planning, for investors who are willing to take on the risk. Unlike many other IHT solutions, an investor can maintain control of their assets as the holdings remain in their name. AIM portfolios are also straightforward and do not involve some of the legal complexities of Trusts. In addition, it can be an effective solution for an ISA. An AIM ISA is free from Capital Gains Tax, Income Tax on your dividends and has the potential to be free from Inheritance Tax.
At Charles Stanley, we have always maintained a focus on investing in cash generating, established businesses in our Inheritance Tax Portfolio Service. These companies need to have experienced and committed management teams who have a proven track record of successfully growing businesses. To find these potential holdings we screen companies, looking for strong balance sheets, profitability and cash generation. We then meet company management several times and often conduct site visits to fully understand the opportunities and risks in these businesses, before we invest. This approach allows us to construct portfolios that are diversified across multiple industry sectors, with strong companies that would hopefully survive in another economic downturn.
AIM remains a minefield, but the rise in quality of its constituents means that there are plenty of gems to be found.
The information contained within this article is based on our understanding of current UK Legislation, Taxation and HMRC guidance, all of which may be subject to change. Nothing contained within this article should be construed as personal advice based on individual circumstances.