‘Is my Aim stock still IHT-free if it’s been taken over?’

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, inheritance tax (IHT).

Many Aim shares, whether held inside or outside an Isa, qualify for Business Property Relief (BPR) which means they can be passed onto 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.

BPR is a valuable relief provided by the government as a way of incentivising investment into certain types of trading companies. HM Revenue & Customs (HMRC) sets the rules that determine which companies qualify, and you may already have a number of eligible Aim investments that stand to benefit from this tax break. Besides being a trading company not listed on a main stock exchange, the main 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 BPR-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 BPR-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 BPR-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.