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The taxing issue of Aim shares and business property relief explained

Chris Boxall of Fundamental Asset Management clarifies the position
November 29, 2018

I have a query that affects me, and – I suspect – a good number of other readers. You occasionally refer to the inheritance tax (IHT) benefits of holding Alternative Investment Market (Aim) shares – ie certain Aim shares benefit from business property relief (BPR) if held for a minimum of two years.

There are a number of funds that will manage an Aim portfolio, and screen shares, as far as possible, to exclude companies that do not qualify for BPR. Octopus is one. I prefer to buy shares directly to avoid management fees, and I currently hold a mixture of Aim and main-market shares in an individual savings account (Isa), managed by iDealing.com. I have read in the IC that the two-year rule requires a continuous holding of Aim shares for the period, but that one does not have to hold the same share throughout.  In the case of a fund, the manager must buy and sell shares as companies go bust, migrate to the main market, or simply underperform. 

Please could you clarify the rules here? Can I buy and sell Aim shares to the same value within a two-year period, with the investment still qualifying for BPR? How quickly must any proceeds be reinvested? What if I add further shares to an Aim portfolio over time? If any of this is possible, would it be wise to open a separate Isa account for Aim shares only?

A supplementary question: I was led to believe that one of the requirements for Aim shares to qualify for BPR is that they must be directly held, ie not held in a fund. If so, how do funds like Octopus get round this obstacle? Your advice would be much appreciated.

J Corran

 

Chris Boxall of Fundamental Asset Management, a specialist investment manager in Aim shares for Inheritance Tax planning purposes responds:

Specialist Aim for IHT managers do not invest via funds, but through individual discretionary managed accounts, opened in the respective client’s name, much like any traditional stockbroker. As the reader suggests, one of the requirements for investing in Aim for IHT planning purposes is that Aim shares are held directly in the client’s name and not via a collective or fund, although via a nominee arrangement is acceptable.  

While not essential, for those adopting a DIY approach to investing in Aim for IHT, it would make it easier if the qualifying Aim shares are held in a separate dealing account to other main-market holdings. 

The rules covering replacement relief allow for the sale of shares in one ‘qualifying’ Aim company and replacement in shares of another, with the period of ownership of shares in the first company contributing to the two-year qualifying period. It’s always essential to ensure full reinvestment of sale proceeds. 

Replacement needs to occur within three years of the sale, although those investing in Aim for IHT planning purposes will clearly wish to reinvest as soon as possible to avoid being in cash on the day of reckoning... for want of a better term.

There needs to be a clear trail of the cash proceeds and subsequent reinvestment of this cash. For example, it could cause problems if cash received following the original sale is transferred out of the stockbroker account, mingled with other cash and subsequently transferred back to the stockbroker account later for reinvestment into new Aim shares. 

It’s also important to keep a close eye on existing Aim holdings as IHT qualification may change over time. For example, we are increasingly wary of companies testing the excepted assets rule through a growing value of passive investments or static cash on their balance sheets. We know of several operating companies that have unwittingly transformed themselves into investment companies. 

Investor’s Champion, a business associated with Fundamental Asset Management, runs a search tool called AIMsearch to identify Aim companies, an investment in which may qualify for relief from IHT. It is regularly updated.

As the reader suggests, a move to the main market would necessitate the sale of the Aim shares. This should take place before the company moves and not after, as the potential relief secured through the initial holding period could otherwise be lost entirely.   

If shares in other Aim companies are purchased with new money paid into the client’s account, the qualifying period for this will begin when the first new shares are purchased.

It’s essential to maintain a suitable transaction record of sales and purchases to support investing in Aim for IHT. Most stockbroker systems should accommodate this; however, a change of stockbroker could make it difficult to follow the trail of sales and purchases.