AIM alternatives: Why investors should look elsewhere for IHT planning

By Matt Taylor, Managing Partner at Rockpool Investments

There are several ways to maximise the wealth you can pass on to the next generation. Strangely the most powerful option rarely gets a mention by the media, but following the changes to Business Relief and Agricultural Property Relief in the Government’s October budget, solutions for inheritance tax mitigation were brought into focus.

The obvious routes for minimising inheritance tax are all relatively limited, like making use of annual gift exemptions, or involve significant cost and loss of control, like establishing a trust or using life insurance policies.

For wealthy investors, buying AIM shares has long been the favoured alternative. That’s because AIM shares are treated as being unquoted, like a family business or even a family farm. What most investors overlook is that for every qualifying AIM share, there are literally hundreds of private company shares. And since diversity is the golden rule of investing, the truly savvy investor concentrates on private companies.

The reliefs available to investors in AIM and private company shares are astonishing. Even under the new rules following the October 2024 budget, investors can still shelter an unlimited value of assets from the full rate of inheritance tax, paying only half instead.

Under the old rules, the value of these shares was completely exempt from inheritance tax. Going forward, this total exemption is still available on the first £1m of share value. Any value above that point is charged at the lower 20% rate. And as before, there’s no limit on the value you can shelter in this way. This amazing route to lower inheritance tax is called Business Property Relief or Business Relief.

Saving tax is all very well, but the quality of the underlying investment is critical. It needs to have growth potential and be fairly valued. This is where focussing on the wide open field of private companies scores highly against AIM shares.

The problem with AIM shares is that they are too easy to buy, and since the inheritance tax saving attracts lots of investors, the price gets bid up. That means you could be paying over the top and effectively giving away a lot of the tax benefit.

In contrast, private companies are hard to buy, and that often means great value. Only the wealthiest investors can make it work alone. Fortunately there are networks which bring together smaller investors, so each person can take just a small slice of each company and spread his or her wealth across a diverse portfolio. These networks also do the work of checking the companies’ profits and prospects for growth before an investment is made and provide regular reporting afterwards.

Private company shares are not listed on public exchanges, so a portfolio of private company shares can’t just be converted to cash at a moment’s notice. Instead, investors with a reasonably mature portfolio should expect it to produce cash gradually over several years. That may be too long for some beneficiaries to wait, but it can also be rewarding to keep holding shares that continue growing at well above inflation. That way your heirs can enjoy for many years the wealth you built up in your life.

Since 2011, Rockpool’s Inheritance Tax Service has been helping investors secure their wealth for the next generation. With a solid track record of returns above the Bank of England’s inflation target, it’s an excellent way to reduce IHT while ensuring capital continues to grow. For more information contact team@rockpool.uk.com or visit the Rockpool Investments website: www.rockpool.uk.com. 

Capital at risk. This type of investment is not readily realisable which means you may not be able to sell your investment when you want to. The tax benefits depend on your personal situation and compliance with the rules, which could change at any time, potentially removing any benefits that were expected.