Investing in AIM shares for inheritance tax relief? Don’t get caught out by these issues

We explain what happens if a BPR-qualifying company moves to a different market or is taken over

Investing in certain AIM stocks to obtain inheritance tax relief is a popular strategy, yet the rules can be complicated. Given that two of AIM’s biggest stocks are poised to leave the junior market – Emis (EMIS:AIM) in a takeover and Breedon (BREE:AIM) which wants to move to London’s Main Market –investors might be asking how the rules work if you switch into a different qualifying AIM stock.

The Key Rules

Your estate won’t have to pay the 40% inheritance tax charge upon your death for any investments in AIM stocks that qualify for business property relief, also known as BPR, and held for at least two years.

If a BPR-qualifying AIM company is taken over, you can passport the time accrued in the stock for IHT relief qualification. For example, let’s say you held EMIS for six months. To retain the IHT relief ‘time’ built up, you would need to sell the shares before the takeover becomes unconditional. You reinvest the proceeds in another BPR-qualifying AIM company and after a further 18 months you will have built up a total of two years in qualifying investments and qualify for IHT relief on that part of your portfolio.

WHAT IF I BOUGHT SHARES IN THE SAME STOCK AT DIFFERENT TIMES?

Let’s say you invested in EMIS on two separate occasions, 1,000 shares bought three years ago (which we’ll call Parcel A) and 250 shares bought six months ago (Parcel B).

You sell the EMIS shares and reinvest the full proceeds into another BPR-qualifying stock. This is where you will need to have kept accurate records of all transactions.

Parcel A had been held for three years so already qualifies for IHT relief. You work out the amount received from selling those 1,000 shares and wherever you reinvest (it can be in more than one BPR-qualifying stock) that new investment will also qualify for IHT relief.

Parcel B had only been held for six months so you need to work out the value of the 250 shares sold and, wherever you reinvest, those new BPR-qualifying shares bought with the proceeds of Parcel B must be held for a further 18 months before that part of your portfolio qualifies for IHT relief.

Once you’ve hit the two-year qualifying period, you can sell the shares and have three years to use that cash as you wish. But you must be reinvested in qualifying AIM stocks before the three-year period ends to retain the IHT relief status.

‘If the investor dies when still in cash, before replacement stocks have been purchased, the cash would be in the estate and subject to IHT,’ notes Chris Boxall from Fundamental Asset Management, a specialist in AIM/IHT. ‘Investing in AIM for IHT planning purposes really demands full investment at all times.’

By Daniel Coatsworth Editor