We hold our investments in self invested personal pensions (Sipps) and individual savings accounts (Isas), and have been investing in Aim shares to mitigate inheritance tax (IHT) for more than five years. Any income generated within our Isas, which we don’t wish to withdraw, is re-invested in Aim shares. This means that while many of our purchases have reached the qualifying two years [holding period for IHT exemption], some have not.
We hold EMIS (EMIS) and used to hold K3 Capital and Crestchic, so wondered what the IHT status is when a company has been taken over? For example, if we had 200 shares five years ago, bought another 100 in December 2021 and a final 50 in April 2022, how do we reset the timeline for qualifying re-investment?
I would assume (hope) the shares we bought five years ago can be re-invested in another company and retain their qualifying status. While the 100 shares bought in December 2021 and April 2022 can be re-invested in another company until they do qualify. Or, does the clock re-set to the start of the two-year timeframe?
PD
Rob Morgan, chief investment analyst at Charles Stanley, says:
It’s been possible to invest in Aim shares within an Isa since 2013 and doing this has a number of tax advantages. Isas invested in individual Aim shares are free of income, capital gains and, as long as certain rules are met, IHT.
Many Aim shares, whether held inside or outside an Isa, qualify for Business Relief (BR) which means they can be passed on to your heirs IHT-free. This is as long as you hold the shares for at least two years, they are still held on death and the company still qualifies for the relief at that point. If the two-year period is not met, a surviving spouse or civil partner can inherit the portfolio without restarting the holding period. Assets left to a surviving spouse are usually free from IHT, so for couples, it is often on the second death that IHT is payable.
BR is a valuable relief provided by the government as a way of incentivising investment into certain types of trading companies. Besides being a trading company not listed on a main stock exchange, the chief exclusions are companies that mainly deal with investments, land or buildings. A company must also not have a second listing overseas that would prohibit it from the relief.
HMRC doesn’t publish a list of BR-qualifying companies. Instead, the relief is assessed retrospectively. When a claim is made during probate, HMRC confirms if any shareholdings qualify and whether the shares can be passed on free of IHT. Companies can cease to be qualifying if, for instance, they move from Aim to the main market, are taken over or merge with others. But if Aim companies are sold before such events and [the proceeds are] reinvested in other qualifying shares, the time built up on the two-year ‘clock’ [until they qualify for IHT status] may be retained on that portion of the portfolio.
It's possible to research Aim companies' investment potential and BR-qualifying status yourself. Companies themselves should be able to say if they have been advised that they may qualify for the relief. An alternative is to invest in a ready-made Aim IHT portfolio of qualifying shares. This spreads your investment across a range of companies to help reduce risk, although any portfolio composed of Aim shares or smaller companies more generally should still be considered higher risk.
There's no limit to how much you can hold in BR-qualifying shares, but you should be willing and able to accept the high risks that [investing in this] market [entails]. Aim is home to some larger, profitable and cash-generative businesses that have become leaders within their fields, as well as less-established, innovative companies with significant potential. However, many Aim-quoted businesses are at an earlier stage of their development and have limited earnings. It can be something of a minefield as some Aim businesses are very high risk and likely to fail at some stage, resulting in investors losing all or a large portion of their investment in them.
Also, share prices of Aim companies typically experience greater ups and downs than those of companies listed on the official list of the London Stock Exchange, and they often have a wide spread between buying and selling prices. At times, it may be very difficult to buy or sell certain Aim shares, so it's important to use a good quality stockbroking service that maximises market coverage.
Kate Aitchison, private client tax director at RSM UK, says:
Your investment strategy using Sipps and Isas sounds very tax efficient. Both investment wrappers offer investment growth free from income and capital gains tax, until income is drawn from Sipps. But there's a significant difference between the two from an IHT perspective, as pensions are generally free from this tax. There's a common misconception that as Isas are a tax advantaged product this also includes IHT.
The IHT relief you refer to is BR, which applies to property consisting of a business or interest in a business, and unquoted shares in a company - as long as the company is wholly or mainly trading. Although this relief normally doesn’t apply to listed businesses, company shares listed on Aim are not treated as being on a recognised stock exchange for these purposes.
The other criteria relate to the holding period of two years. However, there is also provision in the legislation to ‘see through’ company reconstructions, for example, when shares are exchanged for shares in a new holding company, in which case the qualifying period of ownership is at least two years falling within the five years immediately before the IHT event. In the case of your ownership of EMIS shares, if these were acquired in exchange for your shares in K3 Capital, the period of ownership would normally be aggregated.
There are also provisions in the legislation for replacement property. So if you have sold a BR qualifying asset, you can reinvest the proceeds in a new qualifying shareholding within three years and the relief will continue - provided that qualifying assets have been held for two out of the previous five years.
