What should you do with AIM portfolios?

The issue

Up until 5 April 2026 AIM portfolios that have been held for two years will benefit from full inheritance tax (‘IHT’) relief due to the availability of Business Property Relief (‘BPR’). After that date, the BPR rate will be halved for AIM portfolios which means that they will generally suffer IHT at 20% (assuming that the estate is within the scope of IHT). From 6 April 2026 there is ‘only’ a £1 million allowance for each individual for ‘normal’ BPR assets such as shares in privately owned trading companies.

Many individuals who do not have significant stakes in private companies have invested in AIM portfolios in the belief that these assets will enjoy full IHT protection once they have been held for two years. For deaths that take place after 5 April 2026 this will no longer be the case and these portfolios will give rise to IHT at 20% of their market value.

Replacement property

One way of preserving full IHT relief beyond 5 April 2026 is to dispose of the AIM portfolio and then use the proceeds to acquire an asset that will qualify for full BPR (up to £1 million) from 6 April 2026. There are quite a few investment vehicles which could fit the bill here. They often involve bridging loan companies or companies which are involved in renewable energy such as wind farms. Any such investment will have to be made within three years of disposing of the AIM portfolio to be effective. This will only be relevant to the extent that the individual does not already have £1m of other assets which qualify for BPR. I should add that this assumes there is no change to the operation of the replacement property rules when the BPR legislation is updated (this has yet to be published).

Example

Four years ago, Bill invested £400,000 in an AIM portfolio to leave to his son Jake. He had hoped that there would be no IHT on this due to full BPR. Bill is still in good health, and it seems very likely that he will live beyond 5 April 2026, after which time the portfolio would give rise to IHT of £80,000 (or 20% of whatever it is valued at on the day before death). Bill, therefore, sells the portfolio and invests the proceeds in a company which provides wind farm energy. Although Bill had to take a capital gains tax (‘CGT’) hit of £10,000 to do this he felt it was worthwhile given the envisaged £80,000 IHT saving. In addition, he only saw paying the £10,000 CGT liability as costing £6,000, given that it reduced the ultimate IHT liability on his estate by £4,000!

Some taxpayers hold AIM portfolios in ISAs that they have built up over the years – a benefit being that any dividends received on the shares are tax-free within the ISA wrapper. They could break up their ISAs and use the proceeds to invest in replacement property. However, unfortunately, ISAs cannot hold private company shares (such as the wind farm company) and so one disadvantage of doing this is that any dividends or gains in respect of the new company will be taxable.

WSM’s view

AIM shares have had a bit of a rocky ride over the last few years and so many investors may welcome the ‘IHT excuse’ to exit the market. Some may consider acting now in case a mass exodus closer to 5 April 2026 triggers a market freefall (although, as you know, we cannot give investment advice).

As always, great care should be taken with any new investments, and detailed due diligence should be undertaken. Investors will be interested to understand the timescale and structure of any exit in particular. Although it may be possible to enjoy full BPR on the value of the new shares on death, any increase in value may still end up being taxed as income in the hands of beneficiaries. This will apply if (as is often the case) an exit is structured as a company purchase of own shares. It will usually be preferable to have the opportunity to exit through a liquidation after death, but this will usually be commercially unfeasible.

Nevertheless, holders of AIM portfolios should at least be made aware of the opportunity to extend IHT protection beyond 5 April 2026 by switching to assets that attract the 100% relief.