Taking Aim to pass on your wealth
WRONGLY written off as too risky by many, investing in a managed Alternative Investment Market (Aim) portfolio can be a powerful weapon in the arsenal of avoiding paying more inheritance tax (IHT) than you need.
APATHETIC ADULTS
Investec has exclusively released the details of a new study to City PM that reveals just one in four people over 35 who expect to face a bill for inheritance tax have acted, or intend to shelter their assets. The research also finds that of the 3.3m people in the UK expecting to exceed the current IHT threshold of £325,000, 2.5m (74 per cent) have neither set up a trust nor plan to. Loss of access (37 per cent), cost (34 per cent) and the seven year wait before their assets escape IHT (30 per cent) were cited by respondents as the main reasons given for their lack of action. One solution for those looking to circumvent these concerns is to protect wealth in Aim companies. Business Property Relief (BPR), which has been in force since 1984, was brought in to allow the passing of small family businesses without the taxman putting them out of business. Shares in unlisted trading companies are covered by BPR and ever since its formation in 1995, companies on Aim qualify – and so the 40 per cent inheritance tax, chargeable on assets over £325,000, can be avoided.
NOT WITHOUT RISKS
Investing in Aim companies isn’t without risks. Adrian Lowcock of Bestinvest cautions: “The tax breaks are attractive, however the simple rule is that the better the tax break the greater the risk.” He explains: “AIM shares are generally considered higher risk than other shares – partly because the companies tend to be smaller in size and partly because the regulatory requirement for listing is not as onerous.” Jason Witcombe of Evolve agrees, saying: “While the tax breaks of holding AIM shares are attractive, investors need to make sure they are comfortable with the investment risks.”
But tarring all Aim companies with the same brush would be a mistake – they are an eclectic bunch. And this diversity makes stockpicking both fruitful and risky.
Still the rules for determining Aim companies that qualify for BPR, though not insurmountable, do make the work of active management more taxing. For example, if companies are listed on other exchanges or mainly engaged in dealing shares, securities, land, buildings or investments they don’t qualify. Also, as assets must have been owned for at least two years before death, “the trick lies in ensuring that the company activities continue to satisfy the BPR requirements throughout the ownership period, changing to another if activities change so as to maintain BPR eligibility,” explains Simon Leney, tax partner at Cripps Harries Hall. As such, Patrick Connolly of AWD Chase de Vere and most others advise “taking professional advice if you are looking to invest in AIM shares to mitigate inheritance tax.”
BUT WITH THE RIGHT PORTFOLIO
Investing in all equities involves taking on a certain amount of risk. Connolly notes: “We have seen that with seemingly safe and secure companies such as the Royal Bank of Scotland, Lloyds TSB and even to an extent with BP.” And despite the liquidity and volatility risks, Leney says “that risk can be managed by stock selection.” He adds: “if the right adviser is used the inclusion of an element of Aim investment as a sensible component of IHT planning is one recommended avenue.” This is a key point, as a portfolio set up for IHT purposes will be by its very nature focused on the conservative side of the Aim market – in stocks more liquid and less volatile than most.
Barry Anysz, director of the AIM Portfolio IHT Plan at Investec, says the “investments must stand up as on their own,” noting his fund focuses upon mature companies. The flexibility of being able to sell off Aim shares is particularly attractive, says Anysz: “Trusts have traditionally been used to shelter assets from IHT, but many investors rule them out because they don’t want to lose access to their investments.” Danny Cox of Hargreaves Lansdown says: “Unlike other IHT planning such as gifting, the stock remains yours and can be cashed in at any time, although as soon as you do you lose the BPR benefit.” Being able to access some of your intended inheritance is particularly important given the unknown costs associated with long-term care – the potential of technological leaps in future healthcare, no doubt unaffordable through the government, makes access a must.
You might be too young to worry about IHT now, but everyone has family members who could benefit from taking aim to avoid this most hated tax.
USING AIM TO LESSEN INHERITANCE TAX
Advantages
• It is non-contentious – HMRC approved
• Assets are effectively removed from the taxable estate after 2 years – much faster than the standard 7 years for many other forms of planning by making gifts
• It can be helpful for older people for whom 7 years seems a long period
• Not expensive to set up
Disadvantages
• Investing in very small listed companies is inherently risky and could result in the investments falling in value
• Specialist knowledge is essential
• Annual management fees can be expensive – so independent advice is essential
Source: Capital Asset Management