There is a belief that all shares on the Alternative Investment Market (AIM) are exempt from Inheritance Tax. I am sorry to say that whilst a lot of shares do qualify, there are a lot that do not.
The AIM market was introduced as a sub-market to the London Stock Exchange in 1995 and allows smaller, potentially more volatile, companies to hold and trade their shares in a more relaxed regulatory environment. The sought-after Inheritance Tax relief (actually 100% Business Property Relief (BPR) from Inheritance Tax) flows from the original HMRC position that allows someone inheriting a business to do so without having to sell the business to pay inheritance tax. A further rule change in 2013 now also allows AIM shares to be held within ISAs which has increased the AIM share popularity. This is because whilst ISAs are not in themselves IHT-free, they are a popular method of holding AIM stocks as you can switch stocks without the potential worry of a Capital Gains Tax exposure.
There are two sides to the requirements before an AIM share will qualify for the 100% Business Property Relief. Firstly, on your side as investor, you have to hold the shares consistently for two years prior to death in order to attract 100% BPR. This is a period of two years which need not be complete tax or calendar years. Following the original HMRC plan that people should also have a direct stake in a business, the AIM shares must also be held by you personally and not via a fund (holding shares via a stockbroker usually counts as being held by you personally).
From the company side, whilst the AIM market attracts companies in various fields, only certain companies will attract the 100% BPR. Specifically, to attract BPR, the company activities must:
Not consist wholly or mainly of dealing in land or buildings;
Not consist wholly or mainly of making investments;
Not consist wholly or mainly of dealing in stocks and shares; and finally
The company must also not be listed on another stock exchange. Anywhere.
When seeking a suitable investment to attract 100% BPR, you should read the small print of what the company does both on purchase and at any time following in case, for example, the company decides to expand into a new country, list its shares locally and therefore lose its IHT relief in the UK whilst still retaining its AIM status. Should a particular holding fail, and you are aware of it, there may still be time to switch out of that holding and into another and restart the two-year clock. A decent stockbroker will be able to guide further on this and companies are also required to maintain a listing of key data such as their main activities on their websites if you are doing your own research.
If you decide to make a gift (or a transfer into a settlement) of AIM shares and then fail to survive the seven-year period, whether or not the shares will ultimately attract BPR is determined by the company activities as at the date of passing and not as at the date of gift.
As there is no official list of which companies do or do not qualify for BPR, given the amount of IHT potentially at stake HMRC do scrutinize claims carefully to ensure that an investment qualifies.
Although in recent times, the popularity of the Alternative Investment Market for companies may be waning (partly due the shortage of approved Nominated Advisors available to the companies, themselves) it does still hold its attraction for some investors with the potential 100% Business Relief an added bonus. You should remember of course that investing on the stock market carries inherent risks, and you should take appropriate investment advice before doing so. Furthermore, whilst BPR is currently available, it would not be that complicated for the government to withdraw 100% IHT relief on AIM shares in the future.
For now, however, if you aim correctly, you can still hit the IHT target.
For more information on any of the above points, please contact Robin direct.