What options are there for AIM shares after the October budget?

The issue

Acquiring AIM share portfolios has been a tempting inheritance tax (IHT) planning opportunity for many years. This is because once they have been held for two years then they are fully exempt from IHT. This will continue to be the case until 5 April 2026, however (as announced in the 30 October budget) after that date the relief will be halved. Therefore, from 6 April 2026, there will be £200,000 of IHT payable in respect of a £1m portfolio, rather than £nil which would have been payable on deaths before that date.

Even before the announcement, some commentators questioned the wisdom of this sort of planning because of the volatility of the AIM market. Critics would point out the potential for AIM shares to decrease in value and cite examples where investors had lost at least 40% of the value before death (in other words beneficiaries ended up inheriting only 60% of the original investment value even though there was no IHT). It is true that IHT savings were sometimes negated by commercial losses. Now that the risk of commercial losses is at least the same as before, but the IHT upside has been halved, the arguments of the critics seem even more compelling.

Just to be clear, our message solely concerns the tax implications and no part of this should be construed as WSM giving any investment advice. We recommend investment advice is taken from a qualified financial adviser before making any investment decisions.

What could be done?

The AIM market has been fairly stagnant for the last year which means that there are unlikely to be significant gains for investments made in this period. Long-term holders may, however, be sitting on unrealised gains, and strategy will partly depend upon whether gains or losses will be realised on a sale. If significant gains will be made, then capital gains tax liabilities at up to 24% may act as a disincentive to sell to move into other tax-advantaged investments.

IHT planners may find ‘replacement asset provisions’ useful. These can allow qualifying assets to be ‘replaced’ within a period of three years. It may make sense for tax to use these rules to replace AIM shares with assets that will benefit from full Business Relief after 5 April 2026.

The conditions for these to apply are as follows:

1. An asset qualifying for Business Relief replaces another asset which qualifies for Business Relief. This broadly means that the proceeds of disposal of the first asset are used to acquire the second asset.
2. There is a maximum period of three years in which to replace the old asset with the new asset.
3. On death, the combined assets have been held for two out of the previous five years.
4. The assets need to be qualifying assets at the point of sale, replacement, and death, apart from satisfying the two-year rule.

I assume that most people who own AIM shares for IHT-planning purposes are not able to pursue more conventional routes for securing Business Relief, such as investing in family companies. They may instead be interested in taking financial advice as to whether certain widely held investment products, for example, shares in companies involved in bridging finance, are a suitable investment for them. With a fair wind, the 20% IHT charge on an AIM portfolio can be converted to a 0% IHT charge on qualifying shares. Such a 0% rate of IHT will only apply to the first £1m of such business assets, after which a 20% rate will apply.

WSM’s view

As is always the case with these kinds of strategies, IHT savings only ultimately crystallise if the rules stay the same, right up to the date of death. Nevertheless, a discussion with your investment adviser may be a good move to understand the alternative investment opportunities offering greater IHT savings with potentially less risk.