Dwindling AIM and the end of 100 per cent inheritance tax relief

There are rare occasions when it is okay to ‘let the tax tail wag the investment dog’. Something the old adage says we should never do. Using the Alternative Investment Market (AIM) as a tax shelter after having exhausted all other lower risk financial planning options is one such occasion. At least, it used to be.

Two major changes to AIM have significantly altered its role in tax-efficient investing, making it an increasingly complex area to navigate. Those two changes have effectively  docked the tax tail. The question now is whether or not the remaining tax benefit justifies the investment risk.

50 per cent relief sums

The first of these changes was announced by Chancellor Rachel Reeves in the 2024 Autumn Budget and came into effect this April. The rate of Business Property Relief for qualifying AIM shares was halved, dropping from 100% to just 50%. This was a significant effective reduction in the tax saving.

This creates an effective inheritance tax rate of 20% on these assets, rather than the standard 40%. While a 20% tax saving is still a big relative reduction, the net financial benefit is now much less than it once was.

For example, under the old relief a £500,000 AIM portfolio would have passed to beneficiaries tax-free. That same portfolio will now incur a £100,000 tax liability.

The risk-reward calculation that previously made such a portfolio an attractive option is substantially altered. The tax efficiency made sense if you were willing to accept the higher volatility and lower liquidity of AIM shares.

With only half the tax shelter remaining, the underlying performance of the investments themselves must work much harder to justify their place in a portfolio.

Returns will need to be scrutinised more closely, a task well-suited to an experienced investment team, as the tax relief is no longer generous enough to compensate for more volatile investment performance.

The two-year rule

The structural requirements for claiming Business Property Relief on AIM shares has not changed. You must hold the shares for a minimum of two years before they qualify for the relief. And you must hold them at the time of death.

The two-year timeline made AIM shares a possible route for inheritance tax mitigation if you’re at a more advanced age, or if you have received a sudden medical diagnosis, as it is much shorter than the seven-year survival period required for outright gifts.

‘Alternative’ for a reason

AIM is ultimately for smaller, developing businesses. It is by its nature more volatile than the main London Stock Exchange (LSE), and it has  a higher rate of corporate failure. As UHY’s figures demonstrate, that pool of businesses is declining.

AIM has undergone a major structural change. From a 2007 peak of  1,694  listed stocks, the total is now 679. Thanks to a combination of delistings, takeovers, and a weakened IPO market, diversification within AIM is at its worst level in 25 years.

For years, shares listed on AIM offered a straightforward route to mitigate inheritance tax. But, beyond the large effective tax hike that the Chancellor imposed, the relative riskiness of the market this decline in companies represents is now a significant red flag for concentration risk.

Chasing a 20% tax saving by loading an estate with high-risk equities is an unwise strategy if those equities suffer severe capital erosion. If an AIM stock loses a third of its value due to poor trading conditions or wider market downturns, the inheritance tax saving could be wiped out by the capital loss.

It is fair to say that the appeal of AIM has fundamentally changed but this change should not put you off reviewing how the high performing AIM-listed companies can still play a role in a well-rounded investment strategy. AIM may be depleted, but there are still stand-out stocks within it.

It is simply that the core investment case for each company must stand on its own merits, irrespective of the tax wrapper. This underlines the need for rigorous, ongoing due diligence when selecting these assets.

Further complications

Perhaps less well-known, is that not all AIM companies qualify for Business Property Relief. Companies involved primarily in dealing securities, land, or buildings are excluded.

It can also easily be forgotten that a business can change its operational focus over time, inadvertently losing its qualifying status while sitting in your portfolio. Without monitoring, usually via a professionally managed AIM portfolio service, the tax cover you thought was in place may no longer exist.

This potentially makes the already-dwindling pool of assets smaller still!

Navigating all of this requires a careful assessment of whether the reduced tax advantages still justify the inherent risks of the junior market compared to other tax efficient planning methods, an assessment best undertaken alongside your financial planner.

Broader strategy

AIM shares can still play a role, particularly if you genuinely want exposure to UK smaller companies, but they operate best as a component of a wider, well diversified strategy.

Blending AIM holdings with other established wealth transfer methods is a more sustainable and efficient plan. This includes utilising trusts, lifetime gifting, or targeted life insurance alongside your investments.

The era of treating AIM simply as a guaranteed ‘set and forget’ tax haven is well and truly behind us.

Robust financial planning means regularly checking that what you hold is still doing what you included it in your portfolio for in the first place.  These latest changes make the need for a review of your existing AIM exposure and estate plans that much more pressing.

Get in touch:

Please contact your Foster Denovo Partner or email advise-me@fosterdonovo.com or call 0330 332 7866 for more information.

Please note:

This article is for information purposes only and does not constitute advice or a personalised recommendation. It is based on our understanding of current and proposed legislation, which may change.

The value of investments can go down as well as up and you may not get back the full amount invested.

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future.

We recommend that the investor seeks professional advice on personal taxation matters.

This newsletter is for information purposes only and does not constitute advice or a personalised recommendation.

This newsletter is based on our understanding of current and proposed legislation, which may change.

Tax reliefs are those that apply currently, the value of such reliefs will depend on the circumstances of the plan holder and may be subject to change in the future.

Foster Denovo Private Wealth is a trading name of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: Foster Denovo Limited, Ruxley House, 2 Hamm Moor Lane, Addlestone, Surrey, KT15 2SA.
Telephone: 01932 870 720  |  Email: info@fosterdenovo.com  |  Website: www.fosterdenovo.com

Sources 

https://www.gov.uk/government/publications/autumn-budget-2024

https://www.uhy-uk.com/insights/aim-shrinks-61-companies-202425-companies-left-aim-lowest-level-2001