With rising property prices over recent years, inheritance tax is becoming an issue which is increasingly affecting families. Inheritance tax must be paid at a rate of 40% on net assets of estates that exceed £325,000 – the nil-rate band for 2016/7, so can have a major impact on what you can leave to your beneficiaries.
One way of reducing inheritance tax liabilities is to invest in Alternative Investment Market (AIM) shares. In 1995 the AIM was launched as a flotation market for small companies and currently over 1,300 companies are listed – these tend to be small, new businesses with the potential for fast growth. Investing in these companies over more established companies is seen as riskier.
Compared to other assets, AIM shares offer much more generous inheritance tax relief, as they are considered to be business property.
Property becomes eligible for inheritance tax ‘Business Relief’ at 100 per cent if it is held as AIM shares in certain trading companies, for at least two years. It will therefore fall out of the estate for inheritance tax purposes.
Further information about investments qualifying for Business Relief and their tax treatment is available on the HM Revenue and Customs website. Investment portfolios based on AIM shares are now offered to clients by some advisors. These typically invest in a wide range of shares, around 60, offering the investor a spread of risk and the possibility of an inheritance tax-efficient portfolio.
However, not all AIM companies are eligible for Business Relief – to qualify, it must be a trading company which conducts most of its business in the UK. They also cannot be listed on recognised stock exchange.
If the business receives substantial income from renting property or land, or if it trades in land or securities, it will also be excluded.
If when the shares were bought a company qualified for inheritance tax relief but was later ineligible due to these reasons, to retain the Business Relief exemption investors have six months in which to reinvest in new shares.
It is worth considering that as AIM companies are less established, they can be unpredictable. The AIM has less investors than other stock markets and share prices can change be volatile – shares have been known to lose over 40% value, therefore voiding any saving in inheritance tax.
However investing in the AIM might be attractive for older people as assets are exempt from inheritance tax after two years, compared to seven years required before gifts that are ‘Potentially Exempt Transfers’ stop carrying an inheritance tax liability.
Considering investing in the AIM would likely to be suitable for people who are financially secure, who can invest widely enough to cover the risks involved.
We would advise taking professional advice before making any investment decisions.
How Nelsons Can Help
Nelsons has a team of specialist investment management advisers who can offer further information about Inheritance Tax Planning. Call 0800 024 1976 or contact us for more information.