I have been advising clients on their estate planning for many years. Inheritance Tax mitigation is a popular subject especially for those older clients who have children and grandchildren.
In my experience Inheritance Tax is largely a voluntary tax. There are countless ways to legitimately avoid it. Strategies may be complex or simple, expensive or cheap. On the whole, clients prefer simple, low-cost strategies. I agree.
One of the simplest strategies is to invest in AIM qualifying companies. AIM stands for the Alternative Investment Market which is the secondary stock market to the London Stock Exchange. The AIM market consists mainly of smaller companies.
Companies that are large enough to qualify for the main market often prefer to be listed on the AIM market because it is less expensive and there are less onerous regulations.
One of the interesting features of AIM shares is that many of them qualify for 100% business relief. Business relief exempts investment in qualifying AIM companies from Inheritance Tax after 2 years of investment.
We recommend investment into AIM ISA funds because they are free of Income Tax and Capital Gains Tax from day one then free of Inheritance Tax after 2 years of ownership. Access to the capital is allowed at any time and a tax-free income may be taken from the investment too.
The type of AIM ISAs we recommend are ones that invest in the top 30 qualifying AIM stocks which means there is diversification of risk.
Investment performance has been excellent with investment returns of 15%-20% a year over the last 10 years not uncommon. Furthermore, they fully escape 40% Inheritance Tax after just 2 years of investment.
That all sounds pretty good so far but what are the disadvantages of AIM ISAs?
Well AIM ISAs are considered high risk for 2 reasons. Firstly they do not qualify for the Financial Services Compensation Scheme which is £85,000 per fund management group. Secondly, they invest in smaller companies so their prices are more volatile. In theory, there may be no market for AIM shares should you wish to dispose of them but in practice, there is a market for the 30 largest AIM stocks within the type of AIM ISAs we recommend.
However, in practice are these disadvantages true?
Yes, they do not qualify for the Financial Services Compensation Scheme but in practice when is it ever claimed for the failure of an Open Ended Investment Company, OEIC, (and an AIM ISA is a type of OEIC)? To my knowledge never.
Is higher volatility higher risk? Well no actually it isn’t. Higher volatility just means higher volatility. Volatility isn’t risk. Volatility is just volatility. Period. Absolute loss of capital is risk.
No AIM ISA fund of this type (portfolio of the top 30 AIM ISAs) has ever failed, however if it did then investors would be fully protected by virtue of the fact that every AIM ISA has to have a custodian or nominee, usually a large bank, in whose name the investment is registered. That means that in the unlikely event of an AIM ISA failure the investment could not be touched by the product provider. This protection overrides the Investor Compensation Scheme.
So as long as you have a time horizon of, say, 10 years and you are interested in a low cost and simple method of saving Inheritance Tax then AIM ISAs may well be the solution for you. You know it makes sense.*
*Past performance is not a reliable indicator of future returns. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions. AIM shares are high-risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.