Techzone

Investors in AIM shares may need to reconsider their IHT planning following the announced changes to business relief. Assets which they thought were free of IHT will become subject to IHT from April 2026, when relief on qualifying AIM shares and portfolios will be cut from 100% to 50%. Although this measure was not as bad as many expected, it will affect both existing and future investors and needs to be factored into advice.

This means that, on death, estates holding AIM shares could pay 20% IHT on these assets. Clearly there is still an IHT incentive for investors, but clients will need to decide if the smaller incentive is enough to invest in AIM, given the higher investment risk associated with this market.

Why has investing in AIM been popular?   

Until now, AIM has been an attractive option given that the value of taxable estates can be reduced for IHT purposes without having to give anything away. Relief is obtained once qualifying shares have been held for only two years. In addition, if held at death, shares will also benefit from CGT market uplift.

Contrast this to conventional planning by making gifts which may be a disposal at the time of making the gift, would not benefit from market uplift on the client’s death and must be survived by seven years to be successful for IHT.

What has changed?

AIM shares hold their privileged IHT tax status because they are not listed on a recognised stock exchange. They are, however, caught by the proposed legislation because they are listed on the AIM, a secondary market where they can be bought and sold.

While business relief will still be available at 100% for the first £1 million of qualifying business assets, this new combined allowance for business and agricultural relief will not apply to AIM shares.

Looking ahead, 100% relief will still be given on eligible shares held for two years where death occurs before April 2026. Subsequently, individuals will pay 20% IHT, assuming the nil rate band is fully used by other assets in the estate.

New investors will not have owned shares for the minimum two-year ownership period should they die before April 2026 and IHT would therefore be charged at 40%. For deaths after April 2026, tax will be at 20% once held for two years.

Lifetime gifting

Despite eligible shares being exempt from IHT in a client’s estate, it's not uncommon for them to be gifted to other individuals or to a discretionary trust. Before the Budget, once shares had been held for two years, there would be no IHT on such gifts if the settlor survived the gift by seven years. A charge would also be avoided if the settlor died within seven years, as long as the shares were still held by the recipient.

Of course, gifts will also be a disposal for CGT, but any immediate tax will be avoided for gifts to a spouse or gifts into discretionary trusts where an election is made to hold over the gain. Both of these transactions effectively defer any gain.

 The future treatment for IHT will be:

• For gifts made before 30 October 2024, it appears that these will be treated under the old rules as above, although this has yet to be confirmed.
• For gifts of eligible shares made between 30 October and 6 April 2026, there will be no IHT at the time of the gift, but the settlor must survive seven years before they are outside their estate. Should the settlor die within seven years, the gift will be taxed at 20%, even if the donee still holds those shares.
• Gifts made to individuals (other than a spouse or civil partner) on or after 6 April 2026 will be PETs, but on death within seven years will become chargeable at 20% (if the shares still qualify and are not covered by the NRB).
• Gifts made to discretionary trusts after April 2026 will be chargeable lifetime transfers and immediately taxable to the extent that they exceed the available NRB. The rate will be 10%, half the 20% death rate for qualifying shares. Should death occur within seven years then they will be reassessed at 20%.

This means that future gifts of AIM qualifying shares will need to be survived by seven years before they are successful. Given the extra risk associated with AIM and the reduced IHT savings, consideration should be given to more conventional and robust forms of IHT planning, such as discounted gift trusts and loan trusts.  

Asset-backed schemes

There are other plans investors may be attracted to, known as ‘asset backed’ schemes, which are not listed on any markets. These do not appear to have been affected by the proposals in the same way as AIM shares and portfolios. As such, the first £1 million will attract 100% relief (assuming the client does not have interests in any other business or agricultural property). It is uncertain whether this is an oversight, and we will have to wait until the legislation is finalised before knowing for sure.

It may be tempting to consider switching AIM based plans into an asset backed scheme. These would be covered by the ‘replacement assets’ provisions which means that the required two-year ownership period would not be broken. But the transaction would still be a CGT disposal. However, if this loophole is subsequently closed, clients wishing to exit could find this difficult, as the underlying assets may prove difficult to sell.

Trusts and business relief

Relevant property trusts holding qualifying AIM shares will see the rate of business relief cut to 50% for periodic and exit charges arising after 6 April 2026.

The £1 million combined business and agricultural relief allowance will also apply from this date if the trust holds other non-AIM business assets. A consultation on the application of the new rules for trusts will begin in early 2025.

General criteria for business relief

The main conditions for AIM shares to be eligible for business relief have not changed:

• The business must be one carrying out a trade or profession. Investment businesses where the business wholly or mainly deals in securities, stocks and shares, land or buildings are not eligible.
• Companies must not be listed on a recognised stock exchange. It may be the case that shares originally quoted on AIM at time of purchase could later obtain a listing on a recognised exchange. Claims for relief will subsequently be denied unless the quoted shares have been replaced by eligible AIM shares.
• Shares must have been held for two years at the time of death or before being gifted.