If you regularly read the content on our site you will be aware that we frequently ask financial advisers for feedback regarding our Compare tool. This enables us to find out exactly what features advisers consider when looking at a discretionary manager’s business and investment propositions before making an informed decision. We are then able to update our Compare tool accordingly, and add relevant and helpful new criteria.
Based on several requests from financial advisers we added ‘availability of AIM portfolios’ as a new criteria earlier this year. Based on adviser appetite for AIM investing, we thought it useful to share this article from Brooks Macdonald on AIM investing for IHT purposes.
The article answers 4 key questions:
» What is AIM?
» How can IHT benefits be derived by using AIM-listed stocks?
» Who might be suitable for AIM investing?
» How can you access AIM investments?
With the continuing uncertainty around inheritance tax (IHT) liability, clients are looking for ever more innovative ways to protect their wealth for their descendants. Brooks Macdonald spoke to Daniel Boden from advisers Ermin Fosse, and David Holmes of Thorntons Investment Management about Alternative Investment Market investing.
A key attraction of investing in AIM-listed stocks is that they can help mitigate (IHT), providing they meet certain criteria. So, what types of investments should advisers be talking to their clients about and how can they use the approach to maximum effect?
AIM is the London Stock Exchange’s international market for smaller growing companies. Since its launch in 1995, over 3,600 companies have joined AIM to help raise the capital they need for expansion. Well known AIM-listed companies include Fever-Tree drinks, Hotel Chocolat and Patisserie Holdings.
How can IHT benefits be derived?
In a nutshell, says Boden, by investing in companies listed on AIM, provided a number of conditions are met:
“For the investment to be effective for IHT planning, the companies must expect to qualify for Business Property Relief (BPR) and be held by the investor for at least two years. Provided these criteria are met, upon death they should be able to be left to beneficiaries free from IHT.”
It is important to note that BPR qualification remains at the discretion of HMRC and is only tested upon the transfer of inheritance. AIM-listed property and investment companies typically will not qualify for BPR.
Boden warns that restrictions do apply around the sale of these shares. “Investors can sell the shares at any time but, once sold, the proceeds of the sale would become part of the investor’s estate and liable to IHT.”
Who does AIM investing suit?
According to Daniel Boden, Chartered Financial Planner at Ermin Fosse, using AIM stocks in portfolios is a well-established investment strategy. He says it has gained further currency since 2013 when investors have been able to access AIM stocks through ISAs.
Despite their popularity, when it comes to IHT purposes, Boden believes AIM-investing is not suitable for everyone.
“Firstly, it should only really be considered if an IHT liability exists or if the money exposed is surplus to needs, otherwise chances are investment objectives can be met further down the risk spectrum,” he explains. “Due to the volatile nature of investing in smaller companies, as well as the potential for credit and liquidity risk, it is usually more suitable for those with a reasonable amount of investment experience. AIM investment should only be recommended as part of a holistic and robust financial plan.”
David Holmes, Investment Relationship Manager at Thorntons Investment Management, believes that the approach could benefit a number of others, given investors will have access to capital, in contrast to where assets are gifted and control is lost.
“It may be of particular interest to those who have larger ISA holdings, older clients with no IHT planning in place or who are in poor health, or business owners looking to sell their business or who sold their business within the last three years.”
In order to qualify for BPR and potentially reap IHT benefits, individuals must have a direct stake in the business – they cannot be held in a fund. This is because BPR was originally intended to prevent those inheriting a business from having to sell assets to pay the tax.
Due you to the risks associated with AIM-investing, and the ongoing assessment of BPR, many experienced investors do not feel qualified to select individual AIM companies and buy them directly for their clients. An alternative to direct stock picking is to use the services of a discretionary portfolio manager, specializing in BPR-qualifying AIM stocks, such as the Brooks Macdonald AIM portfolio service. This enables access to specific expertise in the sector with extensive research resources and continual oversight for BPR qualification purposes.
Although there are considerable risks associated with AIM, and past performance is not a guide to the future, many AIM portfolios have seen very strong performance in recent years. For example, the Brooks Macdonald AIM Portfolio service has increased by 184% in the five years to 30 June 2017.
For more information about Brooks Macdonald and the range of propositions they offer you can access their dedicated page here.