Building upon our previous article in relation to Enterprise Investment Solutions, here we consider AIM portfolios and the benefits these portfolios offer investors with a potential Inheritance Tax liability.
What is the Alternative Investment Market?
The Alternative Investment Market (AIM) was launched in 1995 by the London Stock Exchange to provide smaller, growing companies with better access to investment with a lower cost and less onerous alternative to a listing on the main stock market.
In the period since its launch, AIM has established itself as the leading market specifically designed to help growing companies access capital from the public market. Today, AIM includes companies operating in more than 100 countries, 40 different sectors and with a combined market capitalisation of over £147 billion. (Source: London Stock Exchange AIM Statistics June 2021).
Several very sizeable and well-known businesses which have successfully passed through the growth stage in their development also continue to list on AIM for various reasons, rather than seek a listing on the main exchange.
Aside from potential for capital growth, an investment into an AIM portfolio could help reduce a potential Inheritance Tax (IHT) liability. Some AIM companies qualify for Business Relief, therefore if shares in these companies are held for at least two years and continue to be held on the investor’s death, they should qualify for 100% relief from IHT.
The timeframe for relief from IHT, 2 years, may be considerably quicker than some of the more mainstream IHT strategies, e.g. gifting funds or establishing a Trust.
Since 2013 it has been permissible to hold AIM portfolios within a tax advantaged ISA.
ISAs offer valuable Income and Capital Gains Tax benefits to investors, however, as with almost all other investments, ISAs which are not invested in AIM shares are subject to IHT. For this reason, AIM portfolios have become more attractive and popular to investors (where appropriate to individual circumstances) who have accumulated significant ISA portfolios.
However, where an AIM portfolio is held outside an ISA, there is the potential for Income Tax and Capital Gains Tax liabilities to arise.
Regardless of whether dividends are distributed or accumulated, any dividends could potentially be liable to Income Tax. For the current tax year (2021/22), UK taxpayers have an annual dividend allowance of £2,000 which exempts dividend income up to this amount from tax. Any dividends received in excess of the allowance in a tax year will be liable for tax at the investors marginal rate.
The sale or transfer of shares within an AIM portfolio will potentially be subject to Capital Gains Tax, which can be offset against any available capital gains exemption, currently £12,300. Any gains realised in excess of any available exemption will be subject to capital gains tax at a rate of either 10% or 20% depending upon the investors personal tax position at the time.
Any unrealised capital gain which exists on an AIM portfolio held by on death will not be subject to Capital Gains Tax.
Based on the above, where an AIM portfolio is held outside of an ISA, it is important to consider the potential for ongoing tax liabilities.
Whilst AIM portfolios offer the potential to reduce any potential Inheritance Tax liability, these portfolios are classed as high risk, even speculative risk investments. This is because AIM companies tend to be smaller, more volatile and subject to less stringent checks than those quoted on the main London Stock Exchange, therefore the risks are greater.
Therefore, these portfolios are suited for investors who are comfortable with the high risks associated. It is important to stress that these types of investments are not suitable for everyone, and we need to ensure appropriate consideration is made of the associated risks alongside the benefits. However, from the above you can see the potential benefits offered by AIM portfolios.
As with all types of investments and services available, we continue to consider the suitability of these investments to meet our client’s needs as part of our ongoing service.
Should you wish to receive further information or discuss these or any other specific solutions, please do not hesitate to contact your Financial Planner who will be more than happy to discuss this with you.