PAM Guide to Wealth Management

Business property relief and AIM investments

Business property relief (BPR) is available, where a gift of relevant business property that has been held for at least two years is made. Relief at 100 percent is available where you own a sole-trader business, an interest in a trading partnership, or shares in an unquoted trading company. Quoted shares where the transferee had control (i.e. more than 50 percent) or land, buildings, machinery or plant owned by the transferor personally, but used by a partnership of which he is a member, or by a company of which he has control, will attract 50 percent business property relief.

A 50 percent test is applied for the purposes of determining whether a company is trading. In addition, relief may be restricted where a qualifying company holds excepted assets, such as large surplus cash deposits and investments.

One way to mitigate IHT might be to invest in certain stocks listed on the Alternative Investment Market (AIM), whose companies may benefit from business property relief. If you buy certain AIM stocks that qualify for relief and remain invested for at least two years, then your share capital qualifies for 100 percent business property relief from IHT. If you sell your AIM holdings, then the cash proceeds are subject to IHT again. To avoid paying IHT on your AIM portfolio, it needs to be held until you die.

Alternatively, you could make a lifetime gift of the shares that would be a PET. If you die within seven years, there will be an assessment of whether the shares still qualify for the relief. If the recipient still holds the shares and they are still qualifying business property, they will be exempt even if the donor dies within seven years of making the gift. If the recipient has sold the shares in the interim, or they cease to meet the criteria for qualifying business property, they will not qualify for business property relief and a tax charge will be payable.

Not all AIM stocks will qualify for BPR and investments do require careful review and monitoring, to ensure they continue to qualify for business property relief. As with VCT and EIS investments, AIM stocks can potentially be higher risk than FTSE All Share companies and financial advice should be taken on the investment implications, as well as the tax implications.

Fund managers argue that not only does the 40 percent IHT relief provide a buffer against capital losses, but also that the risk profile of AIM portfolios can vary significantly. There are sizeable companies on AIM that can make portfolios more defensive and you can spread risk across sectors and companies.

For all the tax benefits, you need to consider that you could lose all of your capital, so you should make sure you understand the risks you are taking.

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