According to the financial forecasters at the UK Office for Budget Responsibility, £5.4 billion will be raised by HMRC from Inheritance Tax (IHT) in the coming financial year. More people have found themselves subject to IHT as the value of property has increased, but one way you can limit your liability is to invest in companies listed on the Alternative Investment Market (AIM).
In a nutshell, AIM is a portion of the London Stock Exchange designed to help smaller businesses raise capital from investors and expand. Because the government wants to encourage investment in these firms, which could bring a real boost for the economy, many qualify for Business Relief. That means once you’ve held shares for two years, your children wouldn’t have to pay IHT on them if you die.
While no one likes to think about their own mortality, this could be an important piece of planning, because although everyone living in the UK can leave up to £325,000 tax-free (£650,000 for a married couple or registered civil partners), all remaining assets are taxed at 40%. That could lead to a sizeable chunk of what you’ve saved through your lifetime ending up with the taxman rather than your family.
There are, of course, several ways to reduce your IHT liabilities by, for example, gifting money while you are still alive. If you can afford to, you can gift up to £3,000 each year and it will be removed from your estate for IHT purposes. You can give away a lump sum of any size and, providing you live for another seven years, it won’t count towards the total taxable value of your estate.
Many of these options might be suitable, but seeking advice is important because the drawback with most is that you give up control of the money. So if you suddenly found yourself, for example, needing to pay for long-term care, it would be beyond reach. An AIM portfolio can offer IHT benefits, but you can sell it and reclaim the capital if you need to.
The AIM index also covers a diverse range of industries, from technology and energy to finance and food, and counts the likes of ASOS and Mulberry among its past success stories. With such a spectrum of businesses to choose from, AIM offers attractive growth potential as well as tax-planning opportunities.
But narrowing down which of the 956 companies currently listed on the index to invest in can be tricky, not least because AIM shares tend to be more volatile than those listed on the likes of the FTSE 100 and 250. The Sanlam Inheritance Tax Service can help here. We run a diversified portfolio with a team of experts to reduce risk where possible.
A risky business
One thing to be aware of is that AIM investments come with more risk. “As with any investment there are no guarantees, but smaller companies are often not as well-known or established as those on the FTSE, plus it’s unlikely there will be any figures available to show how such a firm has performed historically,” explains Sanlam wealth planner Lisa Lloyd.
And while stock markets by their nature are volatile, the more relaxed regulatory requirements that govern the AIM index mean the share prices of companies listed there can fluctuate more widely compared with those on the main indices of the London Stock Exchange.
Then there’s the question of time constraints. AIM-listed shares are often illiquid, so the process of investing or liquidating a portfolio can take longer, plus, in order to eradicate IHT, a client needs to hold the shares for at least two years. In the event that the shares are sold, or the investor dies before this period has passed, the underlying tax strategy will become ineffective.
Invest in the future
Financial advisors can help you consider all of these issues before deciding whether to invest. “We mainly deal with clients who want to pass on their estate to their children in a tax-efficient way,” says Lloyd.
“If the net value of their estate is above the IHT threshold, then we could potentially invest in a portfolio of shares in AIM-listed stock.”
Sanlam offers an integrated approach, with financial planners and portfolio managers working under one roof, something Lloyd believes customers find reassuring. “Once the financial planning team has assessed a client’s attitude to risk, we then work in conjunction with our portfolio managers who oversee the day-to-day investing of stocks and shares,” she adds. “It means when a client comes in for a meeting, they can speak to both their financial planner and portfolio manager and get a complete overview of how their portfolio is doing.”
Despite the risk factor, for some investing in AIM shares is an effective way of mitigating IHT. Lloyd points out that as well as eradicating a hefty tax bill, investors can hold the shares within an ISA and self-invested personal pension, so that any dividends and growth will not be subject to income or capital gains tax.
Ultimately, however, nobody can predict what the future holds, but building an AIM portfolio can offer a tax-efficient way to pass on your wealth.
The value of investments and any income from them can fall and you may get back less than you invested. Your capital is at greater risk investing in smaller companies. We strongly recommend you take financial advice in this area by talking to your financial adviser or portfolio manager.