Investing in AIM to mitigate against the death tax

Judith MacKenzie - Partner & Head of Public Equity

Judith MacKenzie

21 June 2019

Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation.

Inheritance Tax (IHT) solutions are becoming ever more popular with clients keen to shield as much of their wealth as possible from HMRC when they die. Judith MacKenzie explains some of the pros and cons for considering AIM IHT to mitigate against the ‘death tax’

The Alternative Investment Market (AIM) has become increasingly attractive to advisers keen to help their clients avoid potentially hefty inheritance tax (IHT) bills. IHT is levied at 40% on assets above the first £325,000 on an estate and as house prices and stock markets have soared, more and more ‘ordinary’ people are falling foul of the taxman. HMRC raked in a record £5.4 billion in the last tax year and research by Canada Life suggests its annual haul could almost double to £10 billion by 2030.

For some people, investing in qualifying shares traded on AIM can provide an attractive solution. Some, but not all, companies listed on AIM qualify for Business Relief (BR) and as long as they have been held for two years or more, shares in qualifying AIM companies can be passed on free of IHT.

Private investors can create their own portfolio of AIM stocks. However, a practical difficulty is that not all AIM companies qualify for BR so monitoring the market can prove challenging. There is no definitive list of the qualifying status of companies, which can change over time, and there is no guarantee that companies currently qualifying for BR will do so in the future. Finally, investing in AIM is not for the faint-hearted – the market tends to be relatively volatile due to the inherent risk related to smaller companies.

An alternative to self-selecting stocks is to invest via a specialist AIM estate planning service to build a diversified portfolio of AIM stocks to be held over the long-term under a discretionary management contract with an asset manager. In addition to IHT relief, an AIM portfolio can provide investors with the potential for capital growth and dividend income. Advisers can play an important role in this: giving expert advice to ensure that clients understand the risks involved and are clear on the suitability of different products, before deciding on the products to best meet their individual requirements.

AIM companies have seen a significant injection of cash in recent years and some stocks popular with IHT investors have valuations that we do think are wholly justified by the outlook for the company’s revenues and earnings. At Downing, we follow a value-orientated investment strategy and focus on companies at the small end of the market cap level where we believe there is better value and companies are trading on much lower multiples. Essentially, we are not prepared to pay a premium for qualifying AIM stocks and prefer to invest at a discount to what we perceive a company’s intrinsic value to be. We believe that this is one of the best ways to mitigate risk, particularly in this space where legislation surrounding property relief and qualifying status may change.

We do not hold any of the high profile ‘AIM darlings’ such as Asos, Fevertree and Boohoo – all now multi-billion market cap companies that are trading on PE ratios ranging from 41x to 66x (ASOS, Boohoo, Fevertree Drinks). To help spread risk, we aim to invest funds across at least 20 businesses from a number of different sectors. Companies within the Downing AIM IHT and AIM ISA portfolios trade on much lower multiples (Volex, Adept, Lok'n, Latham) and are we aim to invest in companies which have a market cap of less than £150 million at the time of investment – right down at the small end of the market. Current holdings include AdEPT, one of the UK’s leading independent providers of managed services for IT, unified communications, connectivity and voice solutions; James Latham, a UK importer and distributor of wood-based panel products; Lok’nStore, a provider of self-storage and serviced document storage and management services, and Volex, a manufacturer of power cords and cable assemblies for use in electronics and electrical devices. 

The latest figures from HMRC show that while IHT receipts decreased by £64 million in April 2019 compared to March, they were still significantly higher than in the same period last year. Despite this decline, the amount that the tax man takes per month continues to hover in the upper range of where it has been in previous years. This should serve as a reminder that many unsuspecting people are still leaving more of their wealth to the government that they might wish.

There are many ways of mitigating against this unwelcome tax – investing in AIM IHT solutions is only one. Downing’s service also includes downside protection cover designed to reduce the impact of loss (up to 20% of initial net investment) during a minimum of the first two years before the investment qualifies for IHT relief.

We believe Downing’s private equity and VC heritage gives us a competitive advantage over other providers in this space – a private equity approach, decades of experience in micro-cap companies, and an exhaustive due diligence process. Inevitably, each asset manager has developed their own investment style and process. Downing’s approach may appeal to clients who have a keen eye on company valuations and who share our value philosophy. AIM returns may not go up or down in a straight line, there will likely be many bumps in the road. However, we believe that this market can provide a great hunting ground, full of opportunities, where attractive returns can be made over the long term.

Judith MacKenzie
Partner and Head of Public Equity


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This article is for information purposes only and does not form an offer or invitation to purchase, subscribe for or dispose of securities in any of Downing’s products and no reliance should be placed upon it. The value of investments and any income derived from them may go down as well as up and investors may not get back the full amount invested. Smaller company shares are likely to have higher volatility and liquidity risks than other types of main market listed instruments. Any statements may involve known or unknown risks, uncertainties and other important factors, which could cause actual performance to differ from those expected. Past performance is not a reliable indicator of future results. Downing does not offer investment or tax advice or make recommendations regarding investments. Tax treatment depends on the individual circumstances of each investor. Please see the relevant Product Literature for details of charges; your attention is drawn to the risk factors contained therein.