Asset Management

Taking AIM to Mitigate Inheritance Tax

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We are always seeking solutions for our clients and looking to provide products that will help them manage their assets more efficiently, with the aim of protecting and growing their wealth for the future. Preparing for Inheritance Tax (IHT) is an area that regularly impacts on our clients’ financial and legal planning. Across the Progeny Group, depending on clients’ individual circumstances, we can offer a number of ways to tackle and mitigate the impact of Inheritance Tax, to help reduce its capacity to erode your family’s wealth.

At Progeny Asset Management, one of these methods is to give clients the opportunity, by structuring their portfolios accordingly, to take advantage of business rules to reduce their liability to IHT. Our AIM portfolio helps them to do just this.

What is AIM?

AIM – or the Alternative Investment Market to give it its full name – is a sub-market of the London Stock Exchange. It allows smaller, less-viable companies to float shares with a more flexible regulatory system than the main FTSE indices. It is designed specifically to help growing companies access capital. It was launched in 1995 when it was made up of just 10 companies which had a joint value of £82.2 million. Now, just under 1,000 companies from 100+ countries operating across 40 different sectors are traded on AIM with an aggregate value of circa £89 billion1.

The Inheritance Tax Challenge and the Progeny Solution

Inheritance Tax is a tax on the estate of someone who has died, including all property, possessions and money. If the value of your estate is above the nil rate band (NRB) of £325,000 then the part of your estate that is above this threshold will be liable for tax at the rate of 40%. There is normally no tax to be paid if the value of the estate is below the £325,000 threshold, if everything is left to a spouse or partner or if the estate is left to an exempt beneficiary such as a charity. The Residence Nil Rate Band (RNRB) – also known as the home allowance – has recently been introduced which means if you give away your home to your children or grandchildren, your threshold will increase to £425,000.

However, there are ways for investors with estates larger than this to mitigate the impact of IHT through the choice and type of investments in their portfolio. Our AIM portfolio is a discretionary, managed service which chooses investments from this alternative market. It allows clients to invest in the smaller companies traded on AIM, many of which qualify for Business Relief (previously know as Business Property Relief or BPR) – an established form of tax relief that looks to benefit investments in specific businesses. In recent years investment in AIM companies has grown in popularity as a viable estate-planning option.

Not all companies listed on the AIM qualify for Business Relief but the shares of the unquoted companies that do will attract 100% relief after two years. This means that shares in Business Relief-qualifying stocks can be left to beneficiaries free from IHT, provided the securities have been held for two years at the time of death.

Smaller Doesn’t Mean Small

As I’ve noted above, there are some significantly sized companies listed on the AIM index. While it is the home for newer, growing companies, it’s worth remembering that smaller doesn’t necessarily mean small. The ten largest companies on AIM are worth an average £1.8 billion, while 346 AIM companies are worth over £50 million2. The companies on the Progeny Asset Management core list share some impressive statistics3:

  • Average market cap: £681.25m
  • Average turnover (forecast): £337m
  • Average profit after tax (forecast): £19.56m
  • Average dividend yield: 1.8%
  • Average dividend cover: 2.3x
  • Average pay-out ratio: 44%
  • Average EPS Growth: 20 %

Before we put together a client’s AIM portfolio, we take great care to get to know and understand the companies we’re recommending for investment. Our four-step equity selection process underpins our research. Firstly, we perform a quantitative analysis on the company that takes into account factors like growth, momentum, income and value. Next, we concentrate on getting to know what type of business it is. What does it do? Who are the key competitors? How does the management team perform and what do the financial results tell us? Third, having fully assessed the business and met with its representatives, we give each company a score which measures its suitability for clients’ investment. Finally, our own investment committee will bring their considerable industry experience to bear on any decisions before they become final.

Once we have identified a suitable company, it’s important that we continue to monitor it closely. If there are changes to the company that may see it move from AIM to the main market, or the business switches direction, or if it finds itself in circumstances that may exempt it from Business Relief, investors would then also find themselves in danger of losing tax reliefs. In these circumstances, keeping a close and continued eye on the company is vital.

Key Benefits

Investment in the AIM market through our portfolio can provide a viable and successful method of mitigating Inheritance Tax. In summary, here are the key benefits for investors:

  • Speed: Shares quality for 100% relief after only two years – many forms of estate planning such as gifts and simple trusts can take seven years until they are fully exempt.
  • Simplicity: Investment through an AIM portfolio only entails a straightforward and simple share purchase.
  • Access: Clients have access to their investment and can decide to sell their shares at any time and the money will be returned to them (although IHT relief will be lost on money removed from the AIM portfolio).
  • Growth: The AIM is home to a wide variety of companies that offer potential for capital gains and dividends. The market has had some tremendous success stories over the years and there is good capacity for investors to see healthy growth.

If you would like to discuss your options for investing in the AIM, or need any other advice on managing your assets, please get in touch.

1     Source: LSE March 2017
2,3  Source: Stockopedia

This article does not constitute Investment advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your Investment Manager to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested, therefore your capital is always at risk.

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Author Craig Melling

Investment Manager, Progeny Asset Management

Craig joined Progeny Asset Management as a founding member in 2016 from Redmayne-Bentley.

Learn more about Craig Melling

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