According to new data from an investment broker, UK investors looking to protect their beneficiaries from a hefty Inheritance Tax (IHT) bill are flocking to Alternative Investment Market (AIM) shares, which are usually exempt from IHT.
So, why the sudden surge in investor interest in IHT-free AIM shares? And what do investors need to know about AIM shares and Inheritance Tax? Let’s take a look.
Investors and AIM shares: what does the research show?
Nearly £20 million of new money has been invested into AIM companies this year at the Wealth Club. This is an increase of £15 million from last year when investments in AIM shares totalled £5 million.
Meanwhile, the number of people investing in portfolios made up exclusively of AIM shares that are exempt from IHT has more than doubled. The data further shows that the average age of investors with AIM IHT portfolios is 76. The typical amount invested is around £60,000.
What’s behind the huge surge in AIM shares?
The increased money flow into AIM shares comes on the back of a recent five-year freeze on several tax breaks. The current IHT threshold, for example, has been frozen at £325,000 until 2026.
Because of the freeze, pensioners who might have seen the value of their investments and assets rise recently could be hit with a huge IHT bill in the future.
Of particular concern, according to The Telegraph, are investments that might have been growing in investors’ ISAs over the years. Unlike pensions, ISAs usually count as part of your estate and are thus liable to IHT.
To shield their beneficiaries from a potentially hefty IHT bill, investors are now turning to AIM shares.
Why are AIM shares exempt from IHT?
Shares held in some companies currently listed in the AIM market qualify for something called Business Property Relief (BPR). This is a relief that reduces the value of business assets when working out how much IHT will be paid by people who either own the business or own shares in it.
So, if you hold shares in a company that qualifies for BPR in a stocks and shares ISA, the shares will not be liable for IHT. Note, however, that to qualify for the tax exemption, the shares must be held for at least two years.
Do all AIM companies qualify for BPR?
Just because a company is listed on AIM does not mean that it qualifies for BPR.
HMRC does not maintain a list of qualifying companies. A company’s qualifying status may actually change over time, according to the Wealth Club.
The best way to ensure that your money stays in eligible companies is to invest through an AIM ISA. This is simply a pre-packaged portfolio of qualifying AIM shares managed by professional managers. The manager will regularly monitor companies in the portfolio to ensure that they remain qualifying.
What else do investors need to know about AIM shares?
Investing in a portfolio of AIM shares that qualify for BPR can protect your beneficiaries from a hefty IHT bill. However, unlike companies listed on bigger markets like the LSE, AIM companies tend to be smaller and more volatile. Therefore, they present a greater risk.
As with all investments, however, the risk can be reduced by ensuring that your portfolio is well diversified. This is where an AIM ISA can come in handy once more.
Most AIM ISA portfolios are highly diversified, with some holding between 20 and 40 different stocks. The risk of underperformance or even loss is greatly reduced with such a portfolio.