Invaluable tax break for experienced investors
Saving tax is a preoccupation for many investors. However, for some experienced investors the Alternative Investment Market (AIM) offers an invaluable tax break in the form of business property relief (BPR).
AIM is the most successful growth market in the world. Since its launch in 1995, over 3,000 companies from across the globe have chosen to join AIM, helping smaller and growing companies raise the capital they need for expansion.
Strong grounds for optimism
The most recently published survey of AIM companies and investors shows that there are strong grounds for optimism about the future of AIM and the small-cap sector.
Total fundraisings by companies on AIM were up 24 per cent in 2010 and the number of new companies that joined nearly trebled. The AIM All-share Indices increased in 2010 by more than 40 per cent, out-performing the FTSE 100 over the same period.
Inheritance tax savings
By investing in certain AIM-listed companies, experienced investors could potentially save some 40 per cent on inheritance tax (IHT) on their eventual estate.
The shares that can be traded on AIM must not be fully listed on the London Stock Exchange (LSE) and will fall outside an investor’s estate providing they are held for just two years. The shares must be held beneficially for the investor, which can be done either directly or via an investment manager.
No portfolio size limit
There is no limit to the size of the portfolio, which can in all respects be treated like a normal portfolio. Shares could be ‘swapped’ for other AIM shares without losing the IHT break. The shares must be held until death; however, if they are cashed and the proceeds not reinvested in other BPR qualifying shares, they will fall back into an investor’s estate and be taxed accordingly.
It’s therefore important that the portfolio can be earmarked for the estate and won’t be needed during a person’s lifetime, although it is, of course, possible for it to revert back to the investor should they subsequently need the funds for expenses such as retirement home fees.
Lower level of due diligence
Liquidity risk is an important consideration and investors need to accept that AIM companies are subject to a lower level of due diligence than main listed firms. But a ‘normal’ equity portfolio of LSE stocks also carries risk for investors. AIM now has a market value of £75bn, according to the LSE.
There are plenty of well-run, highly successful companies listed on AIM with a strong market capitalisation. These companies offer BPR and therefore IHT advantages should a person holding them die, unlike their listed counterparts.
Investing is not just about tax breaks, it also needs to make commercial sense. A tax break won’t compensate for a poor investment decision and you should always seek professional advice to discuss you particular situation.
Investments in AIM companies are by their nature generally considered to be higher risk. The value of these investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
