There are a number of investments which qualify for exemption from Inheritance Tax (IHT) after an initial 2 year period. This includes forestry and farmland under agricultural relief (AR) and securities quoted on the Alternative Investment Market (AIM) market under business relief (BR). The latter being the most practical investment for private investors.
Most companies traded on AIM, with the exception of those principally engaged in property or investment activities, are eligible for BR. AIM was launched by the London Stock Exchange in 1995 specifically to meet the needs of smaller, growing companies, giving them access to equity capital and a share trading facility and allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market.
Since then more than 3,600 companies from around the world have joined raising more than £100 billion. There are now over 1,000 companies on AIM, across a diverse range of sectors ranging from leading-edge technology to distribution, restaurants, retail and leisure.
The companies trading on AIM have a total market capitalisation of over £90 billion with individual market capitalisations ranging from less than £2 million to more than £1 billion.
Investment in AIM securities does carry a higher degree of risk and volatility in comparison to the shares listed on a main market such as the UK’s FTSE 100 Index, and the value of an investment will fluctuate significantly. However, as part of an overall portfolio investing on AIM may be appropriate due to the potential IHT saving achieved after the initial period of only 2 years. This accelerated IHT relief may compensate for the increased investment risk.
Using a specialist AIM portfolio manager helps to minimise the administrative requirements and dissipate some of the risks of investing in what is a specialist area. IHT relief portfolios are offered by number of discretionary managers who take full responsibility for the initial selection and ongoing management of suitable stocks. A number of criteria can be used in selecting one or more managers including performance track record, expertise in the AIM and small cap markets, charges and quality of administration.
The prime objective of managing a portfolio of AIM shares for inheritance tax purposes is to preserve wealth for the next generation and remove the value from the estate within an shorter timeframe (2 years) than other IHT planning options that usually require a 7 year period. An added benefit of investing in a managed AIM portfolio is that the investor retains access to the capital at all times should it be required.