Inheritance Tax  

Products to help with planning

This article is part of
Intergenerational wealth planning (Part I)

Products to help with planning

Certain financial products can help mitigate a hefty inheritance tax bill, such as Alternative Investment Market shares.

Most shares on the Aim are exempt from IHT as long as they have been held in the estate for two years at the time of death.

This is because, although Aim shares are listed on a stock market, they are counted as being unquoted and, under business property relief rules, shares in unquoted businesses are exempt from IHT.

The rule was introduced to facilitate the transfer of family businesses to the next generation.

What you need to know about Aim shares

Business relief allows the value of an eligible investment – such as some shares listed on the Aim – to be excluded from the chargeable estate as long as the shares have been held for a minimum of two years at the date of death, explains Jon Gould, investment director at Psigma Investment Management.

According to Mr Gould, the minimum two-year holding period is often seen as an attractive alternative to a gift, which would require seven years for the asset to fully fall outside an estate for IHT purposes.

He says: “Furthermore, the individual retains control of the assets in an Aim portfolio, and may withdraw funds if required or if their circumstances change and IHT mitigation is no longer needed.”

Key points

  • Most shares on Aim are exempt from IHT.
  • The Aim should be considered high risk.
  • Life policies can help mitigate IHT bills for descendants.

But he warns the Aim should be considered high risk, and that the appointment of a dedicated Aim investment manager is advisable, given the daily monitoring that will be required on the portfolio.

Laura Suter, personal finance analyst at AJ Bell, says: “If you meet the rules, the executor of your estate can claim the tax exemption when you die, meaning any money invested in Aim will not be subject to 40 per cent [IHT].

“However, there is no clear list of the companies that are eligible for business property relief, so this is an area where it is likely to be better to outsource the task to a specialist Aim portfolio manager,” she says.

“These fund managers specifically run the portfolios to be IHT exempt and take care of ensuring the companies are eligible for business property relief.”

Philip Whitcomb, partner and head of rural private clients at Moore Blatch, warns that the rules on what qualifies are very strict and that investing in Aim stocks can be risky. 

“However, in recent years, a number of investment advisers have put together portfolios of assets in this market that qualify for business property relief and, based on past performances, [they] have been deemed quite successful,” he adds.

What about Isas? 

Nevertheless, according to James Rae, portfolio manager and Aim IHT manager at Charles Stanley, using Aim shares is the fastest way to reduce a potential IHT liability.