Inheritance tax planning: using Aim shares to cut your inheritance tax bill
If you have invested in companies listed on London’s Aim market, you can use them to reduce your inheritance tax bill, says David Prosser. Here’s how.
Business Property Relief (BPR) was an important survivor of chancellor Rishi Sunak’s spring Budget in early March. The tax break can be a valuable tool in planning for inheritance tax, but had been tipped for the chop.
Yet as it turned out, the chancellor made no mention of BPR, leaving people free to continue using it, at least for now.
The basic idea of BPR is that if you leave business assets to your heirs – such as a business you have started, or its assets – these should be treated differently from an inheritance tax perspective to the rest of your estate. In practice, the rules relating to businesses and inheritance tax can get quite complicated, but one aspect of BPR is valuable to a potentially wide audience, including people who have never started a business in their lives.
This is because unquoted shares in a company fall within the remit of BPR. Crucially, “unquoted” has a broad definition – it includes companies listed on the Aim market, the junior market of the London Stock Exchange.
As a result, in the right circumstances, Aim shares will not count as part of your estate for inheritance tax purposes; no tax is thus due on these assets, even if your estate exceeds the threshold at which your heirs would normally have to pay 40% tax.
Don’t buy Aim stocks just for the tax breaks
The first important point to make here is that not allowing “the tax tail to wag the investment dog” is a golden rule of financial planning. In other words, it never makes sense to invest simply for tax reasons. Aim shares, after all, carry their own risks – there is not much point in investing in the hope of securing a 40% tax saving if you lose 100% of your capital.
This caveat aside, however, where you own Aim shares as part of an investment portfolio carefully structured according to your attitude to risk and your financial goals, they can be a useful way to plan for inheritance tax. Aim shares are usually also eligible for individual savings accounts (Isas), within which income and capital gains are tax-free too.
Just make sure you understand the rules. First, BPR comes with a two-year qualifying period – you must have held qualifying Aim shares for two years before your death for the assets to fall out of your estate for inheritance tax purposes.
There is a wrinkle here: they do not need to be the same Aim shares. If you owned shares in one qualifying company for 18 months before selling up and reinvesting the proceeds in another qualifying company, the latter would get BPR after six months.
Second, not all Aim shares qualify for BPR. Certain sectors of the market, including financial services and property, typically don’t. HMRC publishes a guide to what qualifies and what doesn’t, but you’ll need to check each share to be certain, or take professional advice. Roughly two-thirds of Aim shares currently qualify, but the list changes all the time as companies come and go, or change their activities.
How to build an Aim portfolio
How you make use of the Aim BPR tax break in practice depends on your personal circumstances and how hands-on you want to be. It is certainly possible to build your own portfolio of Aim stocks, but you will need to be confident in your ability to choose investments wisely and to stay on top of the tax rules.
The alternative is to pay a stockbroker or financial adviser to do the job on your behalf, or to work with a firm that specialises in building tax-efficient investment portfolios. Firms such as Octopus, Unicorn and Wealth Club, for example, offer specialist inheritance-tax portfolio services.
Either way, the normal rules apply when seeking professional advice. Only work with fully regulated firms – those authorised by the Financial Conduct Authority. And do your due diligence – look into firms’ specialist qualifications, compare their charges (they can be steep, even by financial industry standards, for this particular service), and make sure you feel comfortable with them before handing over your money.
Remember that the government could change the rules at any point
More broadly, you should also be mindful of the potential for tax reforms in the future that torpedo any strategy you devise today. The fact that the chancellor let BPR off the hook in March does not mean he will not change the rules in the future. Given that the Office for Tax Simplification has recommended reform of inheritance tax, BPR remains a likely candidate for an overhaul.
One final point to make is that BPR is not the only inheritance tax relief available on investments. The Enterprise Investment Scheme (EIS) also comes with an inheritance tax advantage: investments in the EIS of up to £2m a year achieve exemption from the tax after two years.
However, the EIS is an initiative designed to boost investment in small, early-stage companies; the tax benefits on offer reflect the elevated risk profile of these businesses, so you must be prepared for the possibility of losses.
As with Aim shares, never invest in companies with EIS status just to get a tax break – and if you do decide the EIS is for you, think about how to build a portfolio of qualifying companies.
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