AIM Investments and Relief From UK Inheritance Tax

AIM Investments and Relief From UK Inheritance Tax

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

This article is here for general informational purposes only, and the facts might have changed since we wrote it.

Introduction

Let’s take a look at AIM investments and the ways in which they can help you better manage your inheritance tax in the UK. However, before we get into that specific aspect, let’s begin by gaining a fundamental comprehension of what AIM is and how it operates.

The London Stock Exchange (LSE) operates a sub-market called the Alternative Investment Market, commonly known as AIM, specifically for the purpose of assisting smaller businesses in gaining access to funding from the public market.

As opposed to the primary stock market operated by the LSE, AIM enables these businesses to increase their capital by listing their shares on a public exchange that possesses a significantly wider degree of regulatory flexibility.

Enterprises that are looking to undertake an initial public offering (IPO) and list on AIM are typically small-scale businesses that have expended their private funds but are yet to hit the required level for an IPO and trade on a large market. 

A conventional IPO is very similar to the process that a company must go through in order to get listed on AIM; the only difference is that the standards for doing so are not as strict. There continues to be a pre-IPO marketing campaign, which includes providing prospective investors with previous financial data in an effort to pique their interest. There is a lock up following the IPO as well.

One of the most notable distinctions between an IPO and listing on AIM is the function that is played in the latter by nominated advisers, also known as nomads. These nomads have the go-ahead from the LSE and are entrusted with guiding firms both before and after they have completed their IPOs.

One of the issues that is commonly brought up when it comes to this interplay, though, is the fact that while nomads are accountable for making sure that regulatory compliance is met, they generate earnings via fees from the firms that they list and remain to supervise under the listing deal.

AIM Investments: Market With Fewer Regulations

Due to the fact that AIM restrictions are less stringent than those of larger exchanges, AIM investments are generally regarded as more speculative in nature. Since AIM is largely self-regulated and nomads are entrusted with the obligation of adhering to the general guidelines, the regulation that applies to companies that are listed on AIM is considered relaxed. 

There have been instances of nomads not living up to their responsibilities, to put it another way, and AIM is not foreign to fraudulent activity (well, neither is any big exchange). As a consequence of this, AIM is likely to appeal to experienced and institutional investors who are willing to take risks and with the resources necessary to carry out independent due diligence.

AIM has come under fire for being compared to the wild west of finance, a place where businesses with dubious morals go to make money. In some instances, this critique has been proven to be valid, most notably with regard to extractive businesses that are active in underdeveloped parts of the world.

However, AIM has also demonstrated the advantages of having a gap market in which risk-seeking investors can assist cash-strapped enterprises in accelerating their growth path. This is advantageous for the business and its investors, and the economy in general.

AIM Investments IPO
Initial public offerings. Image from Global Finance

AIM Investments: Tax Breaks for Individual Investors

Business Property Relief

The acquisition of shares on AIM or the Aquis Stock Exchange, or AQSE, (formerly known as ICAP Securities and Derivatives Exchange) is one of the choices available to applicants for the Business Property Relief program. These are intended to facilitate the issuance of shares by smaller companies at a lower cost and with a greater degree of convenience compared to the primary market.

Because there is a significant level of risk associated with investments made in this market, it is only recommended to individuals who have a comprehensive understanding of all of the hazards that are involved.

The provision of an exemption from inheritance tax that can reach one hundred percent in the case of value transfers is the primary advantage offered by BPR in jurisdictions that make it possible to do so.

The death of a shareholder results in the most prevalent value transfer that occurs with shares. This can occur when the shares are included in the shareholder’s estate or when they were given away during the shareholder’s lifetime and the gift was made in the last seven years.

Investments that are initially eligible for tax relief are added to the estate of the deceased person for the sake of the probate process. At the time of the deceased person’s death, the investments are re-evaluated to determine whether or not they continue to meet the requirements for tax breaks.

If the hundred percent Business Property Relief is applicable, the value of the securities will not be subject to death duties, and as a result, there will be no inheritance tax due on their worth at the time of death.

For the purposes of taxation, the securities that make up an inheritance tax portfolio have to be treated as though they are unquoted. In this context, unquoted refers to securities that are not listed on a traditional stock exchange, like the London Stock Exchange.

When seen from such perspective, shares that are traded on marketplaces such as AIM and AQSE are regarded as unquoted shares.

Additionally, the operations of the underlying company assets must also be used in a continuous trade. This effectively precludes enterprises that trade in securities, land, or buildings, or that are involved in investing activities.

Tax Reprieve for Losses Incurred

AIM investments tax relief
Taking advantage of inheritance tax breaks. Image from indinero

In the event that an investment in shares is sold for less than what it was purchased for, it is possible to deduct the loss sustained from the transaction from the capital gains realized in either the current year or a subsequent year.

When the investment is made in new shares that are subscribed for rather than acquired from an existing stockholder in a trading firm that fulfills the prerequisites of the Enterprise Investment Scheme (EIS), the loss that occurs could instead be eased against the revenue of that year or the year before.

If there is any loss left over after obtaining relief against earnings, then that loss can be used to claim relief towards capital gains in the present year or following years. The amount of a loss that can be deducted from one’s income is subject to a limit, which is capped at the greater of 50,000 pounds (62,052 US dollars) or 25 percent of one’s income.

This limit, which was put in place to prevent people from taking advantage of loopholes in the system, does not apply to losses that were incurred as a result of the sale of shares for which EIS income tax relief was received.

Investments in shares and other securities issued by trading businesses may be eligible for relief from the investment portion of the inheritance tax at either the 50 percent or 100 percent tax rate. The 50 percent tax exemption is offered for those who have controlling stakes in publicly traded enterprises.

Nevertheless, investments in unquoted businesses such as those that are listed on AIM are eligible for a hundred percent exemption, which might promote investment through various opportunities for tax planning.

When a corporation holds excepted assets, which are assets that are not employed for the purposes of the trade, there are certain restrictions that must be adhered to.

The individual’s place of residence is of primary importance for determining inheritance tax. As a consequence of this, a firm does not need to be based in the UK. The vast majority of transactions are acceptable, however a company’s primary or primary focus cannot be any of the following:

If an investment in an unquoted trading firm (which can include an AIM company) fails or is sold at a loss, tax relief for the loss could well be provided. This can minimize the vulnerability of investors to slumping valuations.

In the future, the company’s shares might be listed on a particular stock exchange; however, this will only be possible if the necessary preparations have not yet been made at the time that the shares are sold.

Are there any limitations on what percentage of AIM shares can benefit from inheritance tax breaks?

Although the majority of AIM shares will be eligible for inheritance tax relief, a few of the company’s shares do not. In most cases, businesses in the real estate and banking industries, as well as professional service providers, will not be eligible for inheritance tax break.

What kind of an AIM share would be appropriate for an investment?

You need to perform exhaustive research on every company that has even the remotest chance of becoming an investment for you. In the first step, you should make an effort to familiarize yourself with the company and talk to the members of management.

Take into account some other aspects, such as the robustness of the company’s balance sheet, its capacity to pay dividends and raise those payouts, its level of industry experience, and the areas in which it competes.

Check to see whether the management has also invested a significant percentage of their own wealth in the company; if they have, this may be an indication that they will be more inclined to look out for the value of the shareholders over the long run. This strategy has frequently resulted in investments being made in enterprises that are family-owned and -operated.

In addition to this, you should investigate the possibility of purchasing some assets, such as cash or property, which would provide some protection in the event that the company runs into financial difficulties.

Even after doing all of the research and doing your due diligence, things could still go awry, which is why you need to have between 10 and 15 positions to ensure that you are not excessively exposed to any one particular asset.

AIM Investments: Risks

AIM investments risk
Risks of AIM investments. Image by rawpixel.com on Freepik

Is a portfolio of AIM investments too uncertain?

When compared to investments in larger, more well-established companies, investments in only certain securities, such as shares of smaller companies, companies operating in specialist industries, and/or unquoted companies, typically involve a higher level of risk or price fluctuations (volatility) that are above the average.

It may be difficult or even impossible to sell an investment in a company whose markets are suffering from illiquidity, whether full or partial, as a result of which selling an investment may be difficult or impossible.

The results of the past are not necessarily indicative of the results of the future. You run the risk of losing some or all of your initial investment, and even if you do make money, it’s possible that the amount you get back will be less than what you first put in.

When it comes to quoted investments, the difference between the bid price and the offer price is typically much larger. As a result, if an investor needs to sell a holding shortly following its acquisition, the returns could be lower than the original amount invested.

When it comes to AIM quoted shares, the market tends to provide quotes for relatively small amounts of shares; hence, selling large numbers of shares in the market may result in a price that is lower than the market quote.

There are a lot of smaller businesses out there, and most of them have management teams that aren’t very big. Because of this, the departure of even one person can have a huge impact on how well the company does overall.

 In a similar manner, these businesses are expected to have a narrow product variety and tight cash limits, and they are typically susceptible to unexpected changes in the conditions of the market.

The restrictions for issuers whose shares are posted on AIM are less stringent than those for the official list of the LSE; as a result, the investment risks are higher. It could become tricky or even impossible to offload such shares, let alone estimate their worth or the level of risk that is inherent. The risks associated with unquoted corporations are significantly higher than those associated with quoted companies.

It is important to keep in mind that the advantages of utilizing the Inheritance Tax Portfolio Service are contingent on the fact that the investor’s portfolio will be in existence for the entirety of the time that the present tax rules are in effect. There is a possibility that both the regulations governing taxes and their interpretation, in addition to the appropriate tax rates, will be modified. 

Well, remember that everything is uncertain. But do note that the level of risk associated with these particular types of shares is regarded to be high. Due to the sheer magnitude of the risks involved, it is highly likely that we will ignore a sizeable chunk of the entire AIM/AQSE and unquoted market.

If you go about it in the appropriate way, you should be able to locate a few opportunities that are worthwhile to pursue. The key is to have the experience necessary to recognize which possibilities actually have a chance of becoming realized.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 544.4 million answers views on Quora.com and a widely sold book on Amazon and a contributor on Forbes.

Add a comment

*Please complete all fields correctly

Related Blogs

How To Avoid Estate Tax In US