By DAVID PORTER 12/04/2006
Gordon Brown’s recent attack on Trusts (via the introduction of ‘Entry’, ‘Periodic’ and ‘Exit’ charges on Accumulation & Maintenance and Interest in Possession trusts) has pushed AiM shares to the forefront of Inheritance Tax planning.
When an individual dies, provided qualifying AiM shares were held for a cumulative period of two years or more within the five years before death, that money is deemed to fall outside the individual’s estate. This is due to the shares qualifying for ‘Business Property Relief’ and represents one of the most efficient ways to avoid Inheritance Tax. By contrast, when making a gift an individual has to wait seven years for the monies to fall fully outside of their estate.
| "Business Property Relief represents one of the most efficient ways to avoid Inheritance Tax." |
All AiM shares, including overseas companies, qualify with the exception of certain types of businesses such as those dealing in securities, land, buildings or making and holding investments.
The number of companies listed on AiM continues to grow rapidly; in 2005 there were 519 admissions (of which 120 were overseas companies) and there have been a further 121 already this year. There are now over 1,400 companies listed on AiM with a total market value in excess of £70 billion. This compares to 694 companies with a market value of £18 billion at the end of 2003.
However, it’s important to remember that AiM mainly comprises of ‘micro’ sized companies. The risks are potentially higher than investing in large blue chips and, without careful thought and research, it’s easy to get your fingers burnt. Around three quarters of AiM companies have a market value of below £50m and three quarters of those are below £25m. To put this into perspective, Marks & Spencer Group has a market value of £13 billion and Vodafone £75 billion.
Larger is not necessarily safer on AiM either. Soaring commodity prices mean that many of the largest AiM shares are oil exploration and gold mining companies while the largest AiM stock, Sportingbet, is an online gaming company. Both sectors are volatile, making these shares too high risk for many.
To keep excessive risk at bay, it makes sense to favour mature companies with established business models and good management teams. Businesses with substantial physical assets, such as pubs or garden centres, also make sense as the assets should provide a cushion if the business falters.
| "A portfolio of carefully selected AiM companies can keep risk at a sensible level." |
We expect more and more individuals with large portfolios will turn to AiM in a bid to escape Inheritance Tax. While investment risk is obviously a deterrent, holding a portfolio of carefully chosen AiM companies can keep risk at a sensible level. Nonetheless it’s unwise to invest money you cannot afford to lose, so don’t let eagerness to avoid Inheritance Tax overrule common sense.
For more details about our AiM Portfolio services please call 020 7189 9900.