The thought of having to pay over nearly half of one’s accumulated wealth in tax on one’s death is not good news that is for sure. I have one solution.
For over 10 years I have been investing for certain clients in London Stock Exchange (LSE) selective AIM listed companies with significant success as primarily a method to avoid death duties altogether (at least on this element of their savings). But equally as important has been the capital growth track record and I believe further potential growth is genuinely achievable.
The Alternative Investment Market or AIM is a LSE sub exchange for (in the main) smaller companies. Historically this was known as the USM or Unlisted Securities Market until 1995 when the AIM was established. What is perhaps less well known is that many of the companies listed and traded on this exchange have market values (or capitalisations) comfortably in excess of those listed on the Main Market. I spend much time explaining this to existing and potential new clients because the general perception of this investment arena is that it relates to high risk ‘penny share’ companies which are a few steps from going bust. Accordingly many would-be investors simply avoid the AIM and I would argue (in some cases) wrongly so.
Granted of the 1000 or so companies listed here, the majority are small market value (primarily) resources companies which are illiquid (can be tricky to buy and sell) and logically high risk. But a cursory glance at the AIM 100 index constituents list will reveal many much larger companies and here might begin a stockpicker’s research process. ASOS for example, the online retailer (and the largest company on AIM) has a market cap of £4.9 billion which would make it a FTSE 100 company if it chose to come off AIM. Breedon Group, the UK’s largest independent quarrying of building materials company has a market value of £1.26 billion, Fevertree Drinks is valued at £2.6 billion and both would comfortably be FTSE 250 companies if fully listed. There are many others.
Of these larger market cap companies, most are growing large profits (yes they make money) and where applicable dividends. Most have respected long serving management teams and established institutional investors on board. Most have robust (lowly leveraged) balance sheets, significant net assets and many trade at attractive valuations based on current share prices. If this sounds interesting, it should be and that is before we even talk about the significant tax advantages that come with being invested in this space.
To assist with cost, there is no stamp duty payable on the purchase of AIM shares (unlike Main listed) and they can now be held in tax free ISA accounts. This means any capital gains made (if the shares are sold) and any income received by way of dividends are tax free during the investor’s life. But most importantly, “qualifying” AIM companies are also exempt from Inheritance Tax (IHT) after a 2 year holding period. This is because HMRC has classified AIM shares as business assets and those companies that qualify will attract Business Property Relief (BPR). It is important to stress that BPR is not available on all listed AIM shares and stock selection is thus important to achieve all available tax breaks. Companies for instance, must not be listed on another exchange in addition to AIM ; in other words, there must not be a ‘dual listing’. Companies must not be in financial services or be what would be described as investment companies either. Mining companies should be avoided also. In simple terms, the qualifying company is ordinarily a vanilla UK domiciled business carrying out a bread and butter trade utilising domestic assets. Companies available in this regard span telecom, medical services, engineering, transport, retail and professional services sectors. In other words there is a very decent range of companies to potentially invest in.
Commentary regarding AIM investing often highlights the smaller company element to this space and the corresponding illiquidity in the underlying shares. It describes the area as higher risk than investing in larger, perhaps blue chip companies. While at face value it might be easy to agree with such statements, the fact is over the past few years, well capitalised profitable AIM companies (on the whole) have massively outperformed the large company investment universe.
I have under my management numerous AIM portfolios which have appreciated in value by 50% over the past few years on capital (plus dividends) and that is before one remembers the entire account is free of IHT when the investor passes on! To the extent that volatility and risk normally go hand in hand, good quality AIM companies look arguably lower risk than large cap companies in my mind.
True there has been some additional stimulus which has assisted the appeal of AIM. The capability to buy these companies within ISA environments (from summer 2013) opened up vast amounts of private client capital which was previously only allowed to buy collective investments (funds) or direct Main Market listed equities. It is also fair to say that liquidity is less on AIM and this invariably means large institutions such as hedge funds or leveraged market players will not get involved in this market if indeed they are allowed to be.
By holding AIM companies with an ISA account, an individual is able to have a tax free portfolio of stocks during life which will automatically turn into an IHT free pot of money upon death. Infact I am spending an increasing amount of time migrating client funds within ISAs (accumulated over many years) into select qualifying AIM companies precisely for this reason. It is obviously important the client understands the different (possible risk) characteristics of the underlying investments as part of such a process.
Investing in AIM companies for IHT relief is a far simpler way for an investor to mitigate death duties than more complex IHT strategies. Trust creation (one of the more common approaches) can be timely, expensive and fiddly. Being a direct shareholder in many of the UK’s leading growth companies is straight forward and easy to understand and if an investor requires access to the invested capital, shares can be easily sold unlike assets tied up within a trust.
While tax rules can always change over time, it seems unlikely that governments who have only over the recent past been increasing the tax advantages of investing in AIM will change their stance any time soon. Encouraging investment into UK plc in such ways obviously brings corporation tax take advantages to the extent that such companies continue to generate increasing levels of profit.
This report was written by Philip Scott, Director at SI Capital on 8/11/17.