Reducing Inheritance Tax by Investing

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With record-setting inheritance tax receipts, is it time for investors to consider AIM shares as an IHT mitigation strategy? Inheritance tax has been dubbed the “Voluntary Tax” by some, but it is becoming an unavoidable reality for a growing number of UK families. The latest figures from HMRC show that inheritance tax receipts hit £6.1 billion last year, up £700 million from the previous year. This tax is no longer just for the super-wealthy. Rapidly rising property prices and a frozen nil rate band mean more estates are being dragged over the threshold. However, with the right planning, there are still ways to mitigate your liability legally. One relatively little-known approach is investing in AIM shares. Hold them for two years, and they can qualify for 100% inheritance tax relief. But they are undoubtedly high-risk. 

The Rising Tide of Inheritance Tax

Inheritance tax is 40% on estates valued at over £325,000. This is called the nil rate band, which has frozen at this level since 2009. Property prices surging ahead means more families are caught in the tax net. HMRC figures show that the number of estates paying IHT has jumped 24% over the past year. The average IHT bill is now £214,000.

Families Hit Hard…But IHT is Avoidable

The reality is that IHT has become a middle-class tax. If you own property, especially in London or the South East, your estate could easily breach the £325k threshold. That will leave loved ones with a hefty tax bill unless you plan. Fortunately, there are tried and tested ways to mitigate IHT legally.

The problem is that some of the more common techniques, like gifting and trusts, involve relinquishing control of assets. Investing in AIM shares can reduce your IHT liability but with control retained. After two years, AIM investments benefit from 100% relief from IHT via Business Property Relief rules.

The Attraction of AIM for IHT Planning

AIM may conjure up images of risky penny shares, but today’s AIM is an established market featuring household names like ASOS, Boohoo and Fever-Tree. Launched in 1995, AIM enables smaller, growth companies to float on a more flexible exchange.

Key benefits for inheritance tax planning include:

  • 100% IHT relief – assets held at death after two years are exempt, saving up to 40% tax
  • ISA eligible – you can hold AIM shares in an ISA and benefit from tax-free growth
  • Control – your capital stays fully invested; no gifts or trusts are needed
  • Speed – only a two-year time frame to achieve IHT-exempt status
  • Ease – investing in AIM is a simple and effective strategy to reduce IHT liability

AIM Shares Carry Significant Risks Too

Before you grab your SIPP and fill it with AIM-listed growth stocks, it is vital to appreciate that these investments carry greater risk. AIM companies tend to be:

  • Smaller and less established than Main Market stocks
  • Less stringently regulated than the Main Market
  • Often reliant on a new, unproven technology or product
  • Vulnerable to failures or fraud
  • Illiquid – harder to buy and sell when you want

Beginners Beware: AIM is Not for Novice Investors

Jumping straight into AIM shares without experience could be an expensive lesson. AIM investing requires considerable knowledge and skill. These fledgling companies are at the riskier end of the spectrum. Their shares are extremely volatile. Some will soar as the next big thing; many will crash and burn.

Picking individual AIM shares is challenging, even for professional stock pickers. Novice investors venturing into the AIM arena solo have a much greater risk of losing money. Most experts suggest that a diversified AIM portfolio and expert fund management are essential.

Reaping AIM Rewards Whilst Limiting Risks

If you have experience investing in equities and appreciate the risks involved with AIM, how can you maximise your chances of success? Here are some tips:

  • Use an experienced AIM specialist manager – experts know how to separate decent businesses from dangerous speculation
  • Opt for a diversified AIM portfolio to spread risk – don’t just back 1 or 2 firms
  • Be prepared to hold for the long term – 5 years or more
  • Invest for growth primarily – target established profitable businesses, not early-stage punts
  • Don’t expect too much; set realistic targets – tax savings alone could make it worthwhile
  • Consider AIM an element of a broader investment portfolio – don’t put all your eggs in one basket
Tax Savings Could Justify Higher Risks

Targeting 20% annual returns is setting yourself up for failure, but AIM investing could still beat other IHT mitigation strategies even with more modest growth. After two years, your investment gains IHT exemption. The tax savings alone justify higher risks. With 40% IHT on estates over £650,000, potentially worth over £100k, an AIM portfolio could pay for itself.

Extend IHT Benefits By Using an ISA

You can hold AIM shares directly or via a Self Invested Personal Pension (SIPP) to benefit from IHT relief. But investing in an AIM ISA brings added advantages:

  • Tax-free growth
  • No capital gains tax to pay
  • IHT relief after two years
  • Simple – avoids Probate, passes to spouse tax-free

So, in an ISA, you can achieve tax-free withdrawals while alive. Then pass on 100% IHT free after two years without the costs and delays of Probate. The value of ISA tax shelters is further enhanced if Labour does axe CGT exemptions as some expect.

Take Specialist Advice Before Investing in AIM

With great potential tax savings comes great risk. AIM investing is certainly only for some. Ensure you take professional financial advice before committing serious capital to volatile AIM shares. However, for experienced investors willing to accept higher risk, AIM could help build a portfolio fit to beat inheritance tax.


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