AIM and IHT Efficiency

by | Oct 10, 2014

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Andrew Banks, ‎Senior Investment Manager at JM Finn, Discusses a Business Property Relief Exemption That Many Advisers Miss


 

IHT is an ever-increasing issue for many high net worth individuals – but over recent years, more and more routes to avoid paying the dreaded tax have been closed off. There is one route, however, that is not only still available but has also been enhanced in the last 12 months – namely, Business Property Relief via investment in shares traded on the Alternative Investment Market (AIM).

Clients can build portfolios of qualifying shares up to any value, and after just two years of ownership they will fall outside of those individuals’ Estates for IHT purposes. The usual seven year period for exemption from IHT is usefully shortened.

Clear Encouragement

The enhancement that has made the difference was introduced last August. AIM-listed shares are now eligible for holding within an ISA, meaning that these already tax efficient wrappers are now even more tax-effective. The change demonstrates that the Government considers that AIM has come of age, and that it has moved on from the perception a few years ago that it was the “wild west” of stock markets. A further advantage is that, from April this year, Stamp Duty is no longer payable on purchases of AIM shares – meaning that it is cheaper to own these shares than their fully listed counterparts.

Where appropriate, clients can now transform established ISA portfolios into IHT efficient vehicles. The increased annual ISA allowance also means that a husband and wife, for example, can now shelter their investments from income tax, capital gains tax and inheritance tax more quickly than previously.

Controlling Risk

Yes, AIM shares are deemed to be high risk – but within this broad categorisation there are varying degrees of high risk. As you’d expect, many of the 1,100 or so companies that are listed on AIM are early-stage, start-up, high technology, biotechnology or other shades of high risk/potentially high reward situations; but there are also many opportunities to invest in established, profitable, cash-generative, financially sound and dividend paying businesses.

The key is to know your way around the market; to understand the BPR rules; and, ultimately, to pick the right stocks. This is where an experienced and expert fund manager is crucial.

I spend most of my time meeting company management teams and assessing their businesses and their strategies for growth. And, as I alluded to above, there are certain attributes that we insist upon before we will make an investment for BPR/ IHT Portfolio purposes. These qualities are a good indicator of a company’s health; cashflow and growing dividend payments in particular, are very important to us.

Our objective is to build a portfolio of companies that can withstand economic downturns and deliver solid returns over the cycle. We are not looking to make huge capital returns, but to minimise risk and protect our clients’ hard earned capital as far as possible whilst also sheltering it from IHT. This, I believe, is what most investors require.

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