Products to help with planning

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.

If you meet the rules, the executor of your estate can claim the tax exemption when you die Laura Suter, AJ Bell

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.

He explains: “This means that many elderly clients come to us when they are not sure if they are going to live for seven years, which is the required period between a gift to a beneficiary and the donor’s death for it to be out of the taxable estate.”

Some investors open an Aim portfolio hoping that the holdings will rise in value over the long term, while also sheltering some assets from IHT, according to Mr Rae.

He adds: “These clients typically come to us in their early 70s and add to their portfolios as they age. 

“Often these clients invest in Aim shares through their Isa, which has remained relatively untouched for a number of years.”

But non-Aim investments in Isas count towards the overall estate for IHT purposes.

Ms Suter says: “This means that many people will find it more beneficial to spend their Isa money before their pension pot if they are prioritising the money they can pass on to their offspring.”

While Mr Gould adds: “And, while Isa portfolios are a tax-efficient solution during an individual’s lifetime, they still form part of your chargeable estate on death. 

“Since a change in the rules in 2013, Aim-listed shares have been allowed to be bought in an Isa, many people have looked to their Isa investments as a useful place to start an Aim IHT portfolio.”

Tax incentives on savings and investments hit £30.2bn in 2018, a rise of 5 per cent compared to 2017, but the growth rate has slowed as the government cut tax breaks, according to Salisbury House Wealth.

Cuts to pension tax benefits have been driving the slowdown,

According to an analysis by the wealth managr, benefits granted on investments had been growing at around 10 per cent a year over the previous three years, but the growth in tax benefits on contributions to pension schemes slowed to 5 per cent last year, down from 17 per cent between 2014-15 and 2015-16, as the charts above show.

Indeed, getting access to tax benefits on investments while they are still available is important for individuals and helps to maximise overall returns from their retirement savings.

Cuts to pension tax benefits have been driving the slowdown, with the value of tax benefits on pensions being £25.6bn in 2018-19. 

The slowdown in tax benefits on pension contributions is likely to have been driven by reductions to the annual allowance, which is the amount that can be contributed to a pension tax free, from £80,000 to £40,000 over the last five years.

Tim Holmes, managing director at Salisbury House Wealth, says: “There are tax benefits up for grabs for individuals which should not be ignored… effectively using these benefits can really add enormous value when saving for retirement.”

Life policies 

Aside from such products, what other assets can a client use?

“Life assurance can also be used to either meet or reduce a prospective IHT bill, suggests Mr Whitcomb.

He says: “It is important that the policy is written in trust so that the proceeds of the life assurance policy will not be included in your estate when you die.”

Tracy Crookes, financial planner at Quilter Private Client Advisers, says:“Taking out a life policy that will pay out in the event of death can help but only if you write the policy proceeds in trust.

“If life cover is paid out on your death and you are the owner of the life assurance policy, this payment increases the value of your estate (under current legislation). However, if you write the proceeds in trust, they don’t go into your estate on death but are held within the trust for your intended beneficiaries. 

“This provides the monies to pay the [IHT] bill without having to sell assets out of the estate.”

Victoria Ticha is a features writer at Financial Adviser and FTAdviser.com