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Taking AIM at inheritance tax

I imagine most people want their loved ones to inherit as much of the wealth they have worked to build as possible.

Depending on the size of the inherited assets, marital or partnership status of the deceased, and who the inheritor is, there may be no bill to pay. But, if a bill looks likely then finding legal ways to reduce it is something that may be considered.

What a relief

One way is through business relief which “reduces the value of a business or its assets when working out how much inheritance tax has to be paid”, according to the HMRC. Shares in unlisted companies, that are held by the deceased owner for at least two years before they died, can qualify for 100% business relief, and would not be counted in inheritance tax calculations.

Unlisted does not just mean private business, because many companies that have been admitted to AIM, the London Stock Exchange’s market for smaller companies, can qualify for business relief.

Which AIM companies do not qualify then? Well, those that deal in land or buildings, securities, stocks and shares, or that make or hold investments are not eligible. That means financial and property companies are out, but retailers and manufacturing companies, for example, are in.

AIM companies that once were eligible but end up being sold, wound up, or that transition to the main markets may stop qualifying, so that is something to consider. 

AIM shares are eligible for inclusion in an investment ISA, where they are sheltered from capital gains and income tax, and if they qualify for 100% business relief, won’t run up an inheritance tax bill when its time to pass them on.

Tread carefully

It is possible to gain exposure to AIM stocks then, but remember smaller companies are generally riskier than larger ones and making investment decisions with consideration paid to nothing else besides tax reduction is not smart. High-risk investments could end up being worth nothing, and governments can change the tax rules at any time.

That being said, an investor who already holds AIM stocks or has decided to start investing anyway, may feel better knowing that they could qualify for businesses relief. For those that don’t, an independent financial advisor or tax advisor can assess whether or not AIM stocks fit with someone’s investment and estate planning requirements.

Some good advice on investing in AIM stocks, for those that like to make their own decisions, can be found here. For those that don’t, managed inheritance tax portfolios are available but they have high minimum contributions and attract above-average fees.

Always bear that in mind that AIM investing is not for everyone and should form just a part of a larger investment plan even if it is. You have to build wealth before you can pass it on.

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.