Under current legislation, bequests made to a deceased’s spouse or to recognised charities escape inheritance tax (IHT). After a ‘nil rate band’ IHT is applied at a flat rate of 40%. Each person’s estate has a nil rate band of at least £325,000 (frozen until April 2030) and may also benefit from a further £175,000 of ‘residential nil rate band’ provided:
- the deceased’s main residence is left to a direct descendant, and,
- the total estate value is under £2 million.
For estates valued above £2m the residential nil rate band is eroded by £1 for each £2 by which the total value exceeds £2m. From April 2027, pension funds accruing to the deceased are to be included in the calculation of IHT payable by their estate, bringing more estates into the scope of IHT.
Beyond the nil rate bands, an estate will then be taxed at 40% unless any further reliefs are available. The principal reliefs are Business Relief and Agricultural Property Relief.
Pilling clients can buy and hold shares that qualify for Business Relief. Companies can qualify for such relief provided they pass certain tests related to their activities and financial returns as well as not trading on a recognised stock exchange. The UK’s AIM market is not a recognised stock exchange for this purpose and therefore some companies trading on this exchange qualify for Business Relief. For an estate to be able to successfully invest so as to be able to claim Business Relief the following points should be observed:
- Qualifying AIM securities must have been purchased at least two years before the date of death with the monies remaining in qualifying AIM securities up to the date of death.
- If a qualifying stock needs to be sold, monies must have been reinvested into further qualifying stock under the provisions of ‘replacement property relief’.
- Not all 738 AIM companies will qualify. Companies dealing in property, investments, and general financial instruments (i.e., investment companies) and cash shells do not qualify.
- Until April 2026 successful claims for Business Relief will garner 100% relief from prevailing IHT.
- After April 2026 the relief will reduce to 50% of prevailing IHT.
- AIM stocks can be held in ISAs meaning there is no tax on gains or dividends. AIM stocks also do not pay stamp duty on purchase.
- Away from ISAs AIM stocks are subject to normal rates of CGT and dividend taxation.
Operating within these parameters it is possible for Pilling’s Investment Manager to create and manage a portfolio to take advantage of these far-reaching tax breaks.
We do have to point out that AIM securities are regarded as high risk and trading liquidity cannot be guaranteed. Investors should only contemplate investing in such equities if they can afford to lose any of the capital committed.
We believe the higher risk nature of AIM investing makes it essential to have a broad spread of companies that have been researched and are regularly monitored. At any given time we are monitoring 50 or more companies from which we select for IHT mitigation portfolios. These companies are regularly appraised and added to when appropriate opportunities arise.