Business Relief: Looking at your options when investing in AIM and estate planning services
When talking to a financial adviser about ways to plan for inheritance tax, they may talk to you about business relief.
Shares in companies that qualify for business relief can be passed on free from inheritance tax after holding them for just two years - as long as you still hold the investments at the time of death.
To access business relief, you may be offered the choice of investing through:
Below we highlight the key differences and explain why one or the other may be a better choice for your circumstances.???
Business relief: Key information
Business relief is a long-recognised tax relief that can be used by individuals to reduce their inheritance tax (IHT) bill. Investments that qualify for business relief can be passed on to family or loved ones after your death free from inheritance tax.?
The shares must have been held for two years at the time of death. Business relief, therefore, appeals to UK taxpayers looking for part of their estate to be IHT-free after a relatively short period of time. In contrast, if you give away money during your lifetime it may not be free from IHT until seven years after the gift is made.
Another benefit of business relief is that the investor retains control and access to the money, while potentially benefiting from investment growth.
There are a number of ways to access business relief. For investors, a financial adviser may recommend investing in AIM stocks or investing in a service that offers a wider range of private companies - and we discuss these two options below.?
AIM portfolios
The alternative investment market (AIM) is the London Stock Exchange's market for small and medium-sized companies. Both institutional investors and retail investors can buy shares in companies listed on AIM.
Many AIM shares qualify for business relief and are therefore free from inheritance tax after just two years.
To qualify for business relief, a company has to be trading in the activity it was set up for. So if you invest in a company that is drilling for oil, your shares would not qualify for business relief until you hit oil and start pumping it out of the ground.
There is no way to be certain whether an investment qualifies for business relief. The decision will be made by HMRC at the time of your death.
Investing in AIM shares is high risk, so you would ideally need guidance from a regulated financial adviser.
Due to the complex nature of business relief, and the high-risk nature of investing in companies listed on AIM, a financial adviser may recommend a (discretionary) service that invests in a portfolio of AIM shares on your behalf to ensure diversification (and qualification).
Capital preservation
If your aim is to preserve capital and achieve stable returns of around 4-5% annually, then an estate planning service such as the ProVen Estate Planning Service (PEPS) could offer an alternative to investing in AIM stocks.
PEPS was launched to offer clients the opportunity to invest in companies with the potential to provide reliable income streams, while benefiting from inheritance tax relief. The service builds on ProVen’s lengthy track record of managing venture capital trusts, another tax-efficient investment scheme.
PEPS is a discretionary investment platform that allocates your investment across four trading companies that are focused on solar and lending activities - your allocation will be decided based upon your needs and preferences when you apply.?
These companies are unlisted. PEPS focuses on companies in the solar and lending space that have the potential to deliver modest capital growth and consistent income that can be returned to shareholders through dividends.?
Which is more suitable: AIM or an estate planning service such as PEPS?
This is a subjective answer that may depend on your age, health, attitude to risk and knowledge of which companies are likely to qualify for business relief. It is always worth speaking to a specialist financial adviser in the first instance, who can help you think about these factors.
It is, nonetheless, worth bearing in mind a few key differences. An estate planning service such as PEPS offers dependable returns of 4-5% a year. AIM stocks have the potential to achieve much higher returns - but there is also the risk the share value may drop significantly.
If you envisage a long investing period ahead of you, then you may be looking for a higher annual return than 4-5% to maximise investment growth and so AIM shares may be more suitable for you.??
On the other hand, if your investment time frame is shorter you may prefer capital preservation. The potential for your money to grow at a steady and reliable annual rate may therefore be more important and you may prefer an option that does not invest in AIM (such as PEPS).
Another thing to bear in mind is that it may be easier to sell AIM stocks at short notice, as they are traded on the open market (although they are not classed as ‘listed shares’ for tax purposes, which is why many qualify for business relief).?
However, at PEPS we aim to make it easy for shareholders to withdraw their money if needed by giving investors the opportunity to access their portfolio monthly (subject to liquidity, 30 days’ notice and Beringea’s discretion), with no charges or penalties on exit.
A financial adviser should help a client decide whether an AIM portfolio or an estate planning service such as PEPS is best suited to their needs.
Risks
Both AIM investing and estate planning services are both deemed very high-risk strategies by the Financial Conduct Authority (FCA). You should read the risks associated with the Service before deciding whether to invest.
Bear in mind that target returns are not guaranteed and business relief is not guaranteed. Companies may change their trading strategy and cease to qualify for business relief.??
As with all investments, your capital is at risk and past performance is not a reliable indicator of future results.
UK tax rules and regulations are subject to change, and such changes may be retrospective. Your ability to obtain tax reliefs will depend on your personal circumstances.
Investors should consult an adviser before considering one of the above options.
Find out more about the ProVen Estate Planning Service through our key information brochure.