Inheritance Tax Planning and the Alternative Investment Market

Inheritance Tax (IHT) is a tax on the money or possessions you leave behind when you die. It also applies to some gifts you may make while you are still alive. A certain amount can be passed to your inheritors without being taxed at the current 40% tax rate; this is known as your ‘tax-free allowance’. The allowance or ‘threshold’ for 2013-2014 has been frozen at £325,000 until 2017, the same as it has been since 2010-11.

In recent years, IHT has affected more and more people, mainly due to rising house prices, particularly in London and the South East of England. In fact, if you own your own home in this part of the country, it is likely that IHT will be payable on your estate, regardless of your other assets and savings.

For more information on who pays the bill, exemptions and a handy IHT Calculator, please visit our previous blog on Inheritance Tax Planning.

What is the relevance of the Alternative Investment Market (AIM)?

One way of reducing the amount of IHT to be paid may be to invest in AIM shares. AIM is a sub-market of the London Stock Exchange, allowing smaller companies to float shares in their business. Since its launch in 1995, over 3,000 companies from around the world have chosen to join AIM, which continues to help smaller and growing companies raise the capital they need for expansion. Among these are companies from high-growth areas such as technology, clean-tech and biotech. Investing in these kinds of companies is generally regarded as more risky – especially in terms of their volatility – than investing in established companies, but qualifying AIM shares offer more generous IHT relief than some other assets because they are considered to be business property.

Business Property Relief

If AIM shares are held in qualifying trading companies for a minimum of 2 years, they become eligible for IHT Business Property Relief (BPR) at 100%, i.e. they are removed completely from your estate for the purposes of calculating IHT. There are also Capital Gains Tax (CGT) advantages to holding AIM shares. In addition, from April 2014 shares in AIM-listed companies will be exempt from Stamp Duty.

Not all AIM companies’ shares qualify for BPR, however. To be eligible, a company must be a trading company conducting most of its business in the UK. Companies that trade land or securities or generate a significant level of revenue from letting property or land are excluded, for example.

AIM Shares and ISAs

Since August 2013, AIM shares can be held within an ISA, thus allowing the transfer of existing ISA monies and also new ISA allowances into AIM share portfolios. Once held within an ISA, gains and income from such shares are effectively tax exempt.

Attractive For Older Investors?

Investment in qualifying AIM shares can be attractive for older investors because of their exemption from IHT after just 2 years, compared with the 7 years for Potentially Exempt Transfers. (i.e. If you survive for seven years after making a gift to someone, the gift is generally exempt from IHT, no matter what the value.)

Next steps

If you feel that inheritance tax (IHT) planning is something that you or your family need you should make sure that you consult an expert in the field. There are a number of pitfalls, complexities, and tax mitigation opportunities to consider. If you would like to find out more about the financial decisions you should take now to reduce a possible IHT bill, please contact Marchwood IFA.