Under current tax rules, private investors can benefit from unlimited exemption to IHT if they hold shares in a qualifying Alternative Investment Market (Aim) company for at least two years. This is because shares classed as business assets are exempt from IHT rules and therefore qualify for business relief (BR).
Shares qualifying for BR are also eligible for inclusion within Isas, so can be sheltered from income and capital gains tax.
The rate of relief from IHT on the transfer of relevant business assets is at a rate of 50 per cent or 100 per cent.
Scott Lothian, head of direct equities at Brooks Macdonald, explains: “Investment into Aim-listed companies can offer a compelling mix of tax efficiency and long-term capital growth potential, although tax treatment depends on the circumstances of the individual and may be subject to change.
“Certain Aim shares are treated as ‘unquoted’ for tax purposes and, as such, can potentially qualify for BR after two years of ownership. This allows the assets to fall outside the holder’s estate but does not give up control of the capital.”
He says clients already taking significant equity risk via conventional FTSE 100 holdings are increasingly shifting a portion of their wealth into IHT efficient AIM-listed shares – often within their Isas – to derive further tax benefits.
However, as Ms Beech explains: “While there are opportunities for considerable growth, Aim investing is higher risk, so it is important to be aware of potential losses before investing.”
Mr Lothian agrees, but adds: “Aim investing is clearly not suitable for everyone, but for individuals with a significant IHT liability, it can provide a compelling investment proposition, especially as part of a broader and diversified financial planning strategy.”
According to Mr Clough, certain assets like farmland and woodland qualify for agricultural relief.
“Here, if you own the asset for more than two years, then the asset is taxed at 0 per cent," he says. "This allows you to retain control and ownership of the asset, but it can be expensive and illiquid.”
Life insurance
Clients can cover IHT liability by taking out life insurance for the potential bill and placing the policy in a trust to ensure it is paid outside of the estate.
Mr Jones comments: “One of the simplest solutions is the use of a suitable life policy to provide the beneficiaries with the ability to pay the IHT liability.”
This solution can be cost-effective and useful for estates which are asset rich and cash poor, so can use the exemption for surplus income.
However, this also relies on the client being honest about disclosure of any serious conditions; failure to do so might see the insurer refuse to pay in full or at all.
