Inheritance tax planning through a portfolio invested in AIM shares

2021

AIM portfolio service

Please read the important information

AIM portfolio service

Smith & Williamson’s AIM portfolio service is designed to provide clients with an opportunity to reduce the inheritance tax payable by their estates on death, while maintaining access to their capital.

Shares in companies traded on the Alternative Investment Market (AIM) are currently treated as unquoted shares for tax purposes. AIM shares can qualify for Business Relief (BR, formerly known as Business Property Relief, BPR), which can provide 100% relief from inheritance tax (IHT), provided the shares have been held for a total period of no less than two years at the time of death.

Smith & Williamson offers a discretionary AIM portfolio service for private individuals investing £50,000 or more.

Our disciplined investment process seeks to identify a range of companies, diversified across industries, with more defensive characteristics, on average, than the index of AIM companies.

We suggest that any AIM portfolio only forms a portion of an individual’s wider assets due to the risks of investing in AIM shares.

AIM portfolio IHT worked example

Without AIM portfolio

With AIM portfolio

Value of investment portfolio

£200,000 £200,000

IHT due @ 40% £80,000 -

Value of portfolio after IHT

£120,000 £200,000

Note: This example assumes that the IHT nil rate band allowance (currently £325,000) is already fully used and that the rate of IHT is 40%. Although there is no initial setup fee charged by Smith & Williamson, there would be transaction costs incurred when investing an AIM portfolio.

This table makes no allowance for the effects of fees or investment performance, the value of your investments may go down as well as up. This table is for illustrative purposes only. Qualifying investments must have been held for a minimum of two years to be eligible for BR, though qualification itself cannot be guaranteed.

Introducing our AIM portfolio service

AIM portfolio service3

Investment processWe focus on the larger, more established companies with clear track records of disciplined management, evidenced by earnings and dividend growth. All potential holdings are subject to a series of tests to ensure suitability for an AIM portfolio. We look for companies with strong balance sheets. In particular, we examine borrowing levels and asset backing.

If a company satisfies our quantitative tests, our AIM portfolio team carefully assesses its valuation, business model and growth potential. This is coupled with initial, as well as ongoing, meetings with management before approving it for investment. Sector diversification is an important consideration in this respect.

Any potential investment is examined by our in-house corporate tax specialists to assess compliance with the Business Relief (BR) regulations. Only then is it considered for inclusion in client portfolios.

Managing the investmentsInvestment in AIM stocks requires specialist expertise. Direct equity investments are, by their very nature, high risk. AIM quoted shares may carry risks above and beyond those found in larger companies.

AIM companies are subject to lighter regulatory requirements when listing and reporting than companies listed on the London Stock Exchange main market.

By nature of their smaller size, it can be difficult to deal in AIM companies due to limited liquidity, i.e. it may be difficult to purchase and sell. Share price volatility can typically be greater in smaller companies.

AIM-traded shares often attract less analytical coverage than their fully listed peers, although, in certain circumstances, this can create opportunities.

To manage these risks, Smith & Williamson has a team of investment specialists that applies our rigorous investment process to build and manage AIM portfolios.

The tax status of AIM investmentsNot all shares listed on AIM will qualify for BR. The tax regulations are complex and many aspects are subject to interpretation by HMRC. There is a risk that stocks may not qualify for BR or that the rules may change. The levels and basis of relief from taxation may alter or disappear. Furthermore, the tax status of companies can change. These issues need to be monitored continually.

Chargeable gains are subject to capital gains tax (CGT) at the client’s prevailing rate.

We monitor closely the qualifying status of the portfolio to ensure, as far as is practically possible, it complies with the tax exemptions currently available. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Our portfolio service explained

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Quality of service and reportingClients have direct access to their investment manager to discuss their portfolio at any time. In addition clients receive:

• quarterly valuation reports (with a copy to other advisers if required) showing the up-to-date value, performance and composition

• a comprehensive nominee and custodian service provided by our own internal nominees

• a comprehensive annual tax report detailing income received and capital gains realised

• internet access to client portfolios

• a carefully monitored audit trail of stock purchases and sales is kept to assist with HMRC reporting requirements and show compliance with current tax legislation

• capital and income accounts set up on the client’s behalf

• fees are debited quarterly from income where possible (surplus income can be reinvested or transferred to a chosen bank account on request or by standing order).

Next stepsYou should discuss the suitability of an AIM portfolio with your financial adviser or your usual Smith & Williamson contact.

Should you wish to proceed, you will need to complete an AIM portfolio account application and sign and return our risk warning to confirm that you have understood the risks involved.

If appropriate, we will also need you to assist us with identification checks to comply with current anti-money laundering regulation.

About AIMThe Alternative Investment Market (AIM) is often referred to as the second tier of the London Stock Exchange. Launched in 1995, it is now widely recognised as an integral part of the London capital markets and the leading smaller company market in Europe. AIM has been used as a stepping stone by small, growing companies, which float on AIM before progressing to the Main Market after several years. It is now increasingly viewed as a successful market in its own right.

Our service

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Important Information & Key RisksShares in AIM companies are likely to be high risk and volatile. Their value, and the income arising from them, may go down as well as up, and there is the possibility that investors could lose their entire investment.

Investment in AIM companies is suitable only for investors who wish to be exposed to high-risk investments.

References to our assessment of a company’s growth potential, management ability and value are references to our opinion only. We neither make nor imply any warranty as to the actual performance of an AIM-qualifying company.

Any references to past performance are to the performance of the managers in managing other AIM investments. Past performance cannot be indicative of future performance.

Shares in an AIM company may be illiquid and it may be difficult or impossible to sell them. Likewise, it may be difficult to obtain a value for such shares.

This document sets out our understanding of the current tax benefits that apply to investments in AIM shares. Tax regimes are liable to change and the current arrangements may not continue. The value of any tax relief will depend on the individual circumstances of the investor.

Disposal of an AIM portfolio may risk proceeds being brought back into the taxable estate. If a company’s shares cease to qualify as business property, they will no longer qualify for IHT relief. Smith & Williamson Investment Management LLP offers no guarantee as to

individual stocks qualifying for tax treatment or relief of any description. Investments are made on a ‘best endeavours’ basis.

No tax relief is available on invested funds prior to their investment in qualifying shares.

Nothing in this document constitutes advice on investment or taxation matters. Investors should take independent investment and taxation advice, which can be provided by Smith & Williamson.

This document contains information from sources believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to its accuracy or completeness. This is neither an offer nor a solicitation to buy or sell any investment referred to in this document.

Smith & Williamson Investment Management LLP documents may contain future statements which are based on our current opinions, expectations and projections. Smith & Williamson Investment Management does not undertake any obligation to update or revise any future statements.

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About Tilney Smith & Williamson

Tilney Smith & Williamson is the UK’s leading integrated wealth management and professional services group, created by the merger of Tilney and Smith & Williamson on 1 September 2020.

With over £51 billion of assets under management, it ranks as the third largest UK wealth manager measured by revenues and the eighth largest professional services firm ranked by fee income.

The group has a network of more than 30 offices across the UK, as well as the Republic of Ireland and the Channel Islands.

Tilney Smith & Williamson’s personal wealth management services include financial planning, investment management and advice, online execution-only investing and personal tax advice.

For businesses, its wide range of services includes assurance and accounting, business tax advice, employee benefits, forensic advice, fund administration, recovery and restructuring and transaction services.

As an investment manager, Smith & Williamson Investment Management LLP often has access to Initial Public Offerings (IPOs) and secondary market placing opportunities not generally available to the public.

We take the time to get to know you and to understand your objectives, needs and aspirations, as well as the longer-term challenges you’re likely to face, to help meet your investment objectives.

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We have been looking after the financial affairs of individuals, families and businesses for more than a century.

Investment Offices: London, Belfast, Birmingham, Bristol, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton.

Smith & Williamson Investment Management LLP Authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority dos not regulate all of the products and services referred to here including Tax, Assurance and Business Services.

Tilney Investment Management Services Limited Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, No. 02830297, FRN: 165169.

We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Tilney Smith & Williamson Limited 2021. Code: 71421lw. Exp: 31/05/2022

New clients please contact:

Jamie Summerst: 020 7131 4641 e: jamie.summers@smithandwilliamson.com

Professional advisers please contact:

Mickey Morrisseyt: 020 7131 4693 e: mickey.morrissey@smithandwilliamson.com