Investing in AIM (Alternative Investment Market) shares is a strategy some individuals use to reduce Inheritance Tax (IHT) liability in the UK. AIM shares are often attractive because certain AIM-listed companies qualify for Business Relief (BR), which can reduce the value of an estate for inheritance tax purposes. NMTBP looks at how this strategy works

Business Relief overview

Business relief can reduce the value of business assets for inheritance tax by 50% or 100%. AIM shares in qualifying companies can receive 100% relief after they’ve been held for at least two years. This means that if the shares meet the criteria, their value can be excluded from the estate for IHT purposes, provided the shares are still held at the time of death

Qualifying for Business Relief

Not all AIM shares qualify for Business Relief. The key criteria include:

• The company must actively trade rather than focus on investment activities, such as property or land dealing, financial services, or making investments
• The shares must be held for at least two years before death to qualify for BR

Common sectors where qualifying AIM companies are found include technology, healthcare, and industrials. However, care must be taken to avoid companies focusing purely on investments or other exempt activities

Tax benefits of AIM shares

• Inheritance Tax (IHT) reduction: If the shares qualify for Business Relief, the value of the AIM shares may be exempt from IHT, which is charged at 40% above the nil-rate band (currently £325,000, with additional reliefs like the residence nil-rate band)
• No stamp duty: No stamp duty is payable when purchasing AIM shares, which can reduce transaction costs
• Growth potential: AIM shares offer the potential for capital growth. However, they are often riskier and more volatile than the primary stock exchange shares

Risks and considerations

• High risk and volatility: AIM-listed companies tend to be smaller and less established than those on the primary market, leading to higher risk and volatility
• Liquidity: Selling AIM shares quickly, particularly in large volumes, may be more problematic, as the market can be less liquid than the main stock market
• Investment selection: Not all AIM shares qualify for Business Relief, so careful selection and professional advice are necessary
• Timing: The shares must be held for at least two years, which means the timing of investment decisions is critical

How to invest in AIM shares

• Direct Investment: You can invest directly in AIM shares through a stockbroker or an online trading platform. Research is essential to identify companies that qualify for Business Relief
• AIM IHT Portfolios: Some investment firms offer AIM IHT portfolios specifically designed to invest in a diversified selection of AIM companies that qualify for Business Relief. These portfolios are managed by professionals who aim to reduce the IHT liability while managing the investment risks

Combining AIM shares with other IHT planning

AIM shares can be part of a broader IHT mitigation strategy alongside options such as:

• Gifting: Making lifetime gifts to family or into trusts
• Use of pensions: Leaving pension funds outside the estate
• Life insurance: Using life insurance to cover IHT liabilities

Thanks to business relief, investing in AIM shares can be an effective tool for reducing Inheritance Tax. However, AIM shares come with significant risks, and it’s essential to seek professional financial advice to ensure the investments align with both tax planning and investment goals. The shares must be held for at least two years, and only companies that meet specific criteria will qualify for relief, so careful selection is critical.