AIM Shares & UK Inheritance Tax
Today, we’re tackling a topic that could have major implications for estate planning and investment strategies: We’ll cover what AIM shares are, how they work, and why they offer significant tax benefits under the current rules. However, things might be about to change. The UK government has recently hinted at sweeping reforms in the upcoming budget, and these could include the removal of the IHT exemption on AIM shares.
This change could have significant consequences—not just for investors, but also for the small, innovative companies that rely on AIM to access capital. We’ll explore what these proposed changes could mean for investors, and the market as a whole, should these valuable reliefs be caught in the Labour Governments crosshairs.
What Are AIM Shares?
The AIM (or, Alternative Investment Market) is a sub-market of the London Stock Exchange, designed for smaller, growing companies that might not meet the requirements for a full listing on the main market. AIM shares allow these companies to access public capital and grow their businesses, while providing investors with the opportunity to invest in early-stage, high-growth companies.
Some key features of AIM shares include:
Less Regulation: AIM-listed companies don’t face the same strict regulatory requirements as those on the main market. This allows them more flexibility but also comes with higher risks for investors.
Potential for High Returns: Since AIM companies are often in their early growth stages, they offer the potential for higher returns—albeit with greater risk.
Inheritance Tax Relief: One of the key attractions of AIM shares for investors, and a focus point of today’s video, is their potential qualification for Business Relief (often shortened to ‘BR’), which can exempt them from inheritance tax after being held for two years.
For many investors, the inheritance tax relief has been the primary driver behind holding AIM shares. This relief incentivises investors to support smaller, fledgling companies looking to raise capital. However, if the new Labour governments proposals come into play, this could be set to change.
How AIM Shares Help Mitigate Inheritance Tax
Inheritance Tax (or IHT) is levied at 40% on the value of an estate that exceeds the £325,000 ‘Nil Rate Band’ threshold (or £650,000 for married couples). AIM shares that qualify for Business Relief can be passed down free of IHT if held for two years or more. This is a huge benefit for families looking to pass wealth on to the next generation, without passing a big chunk to the government.
Business Relief applies to shares in businesses that are classified as “unlisted,” and many AIM shares fall into this category. So, by investing in qualifying AIM shares, individuals can reduce or eliminate their IHT liability, making it a popular strategy among those who are planning their estates.
However, there are a few important caveats:
Qualifying Investments: Not all AIM shares qualify for Business Relief. Companies primarily involved in investment, land, or property development, for instance, won’t qualify.
Risk: AIM shares tend to be riskier investments due to the smaller size and early-stage nature of many companies. So, while the potential tax savings are appealing, the volatility and risk must be factored into any investment decision.
Let’s now look at a real-world example to illustrate the impact AIM shares can have on inheritance tax planning:
Case Study - How AIM Shares Mitigate IHT
John is 70 years old and has an estate worth £800,000, which includes £200,000 invested in AIM shares that qualify for Business Relief. Without any IHT relief on his AIM holdings, his estate would face a tax bill of £190,000 (that is, 40% of £475,000, which is the value of his estate above the £325,000 threshold).
However, because John’s AIM shares qualify for Business Relief, and he’s held them for longer than 2 years, the value of these shares is exempt from IHT. This reduces the taxable portion of his estate to £600,000, leaving a much smaller tax bill of £110,000.
In this scenario, John’s investment in AIM shares saves his estate £80,000 in inheritance tax. That’s a significant reduction, making AIM shares an attractive option for those looking to minimize IHT.
But with the UK government’s new proposals looming, this strategy may not be available for much longer.
Potential Changes To IHT Relief On AIM Shares
In the upcoming budget, there’s growing speculation that the government might scrap the IHT relief on AIM shares. This change could raise substantial revenue for the government—around £1.1 billion in the 2024-25 tax year, rising to £1.6 billion by 2029-30, according to the Institute for Fiscal Studies.
If the relief is abolished, the implications for investors and the market could be far-reaching:
Market Sell-off: If the relief is abolished, there could be a sell-off in AIM shares, particularly among investors who had purchased these stocks specifically for IHT planning. This could depress share prices and affect the overall market for UK smaller companies.
Impact on Small Companies: AIM provides vital funding to smaller UK companies that rely on capital from investors. If investors shy away from AIM due to the loss of tax relief, it could stifle growth for these businesses.
Loss of IHT Benefits: The most obvious impact is that investors would lose the 100% IHT exemption on qualifying AIM shares. This would reduce the incentive for individuals to invest in these high-risk shares purely for tax mitigation purposes.
This potential change is a clear example of how tax legislation can shape investment strategies—and why it’s essential for investors to stay informed about policy shifts.
What Would This Mean For Investors?
So, what does this mean for investors who are using or considering AIM shares for IHT planning?
First, for those who hold AIM shares, you might want to monitor the government’s announcements closely. If the IHT relief is scrapped, it may still make sense to hold onto certain AIM shares if they fit within a broader investment strategy. However, for those holding AIM shares primarily for tax mitigation, this could change your plans.
If you’re considering investing in AIM shares, you’ll need to weigh the potential risk of legislative changes against the current benefits. Remember, while tax relief is a powerful incentive, AIM shares come with significant risks due to the volatility and smaller size of the companies involved.
It’s also worth considering alternatives to AIM shares for IHT planning. Other options include making gifts, setting up trusts, or investing in other vehicles that might offer more stability—though they may not offer the same level of tax relief as AIM shares currently do.
Ultimately, the best course of action will depend on individual circumstances. Consulting a financial adviser will help you understand how these potential changes could impact your IHT planning and overall financial strategy.
Final Thoughts
To sum up, AIM shares have long been a valuable tool for mitigating UK Inheritance Tax through Business Relief. However, with the possibility of government reforms, investors need to prepare for potential changes that could eliminate this advantage.
For now, AIM shares remain a tax-efficient option for reducing IHT, but they are also a higher-risk investment. As we await the government's final decision, staying informed and proactive in adjusting a financial strategy will be key.
Get in touch
Do you have a question about tax efficient investments? We’re here to make it simple. Leave us a message via the submission form button below, and let’s chat. We’re always happy to help.
No financial decisions should be taken based on the content of this website or associated videos. The guidance contained within this website is subject to the UK regulatory regime and is therefore primarily aimed at viewers in the UK. Always take full individual advice first. Regulations and legislation governing taxation, investments and pensions may change in the future.
The content on this page is accurate as of the 2024-25 tax year.