Mitigating Inheritance Tax on Platform using AIM shares
Increasingly Financial Advisers are focusing on the Inheritance Tax (IHT) mitigation needs of their clients. At the same time Financial Advisers are being encouraged to keep client assets on Platform for ease of management and monitoring. Until recently these trends had actually been to some extent conflicting with the investor having to take their assets off platform to access the various IHT solutions. However, it is now possible for investors to access IHT mitigation on platform.
Here, the IHT mitigation we are reviewing is through investments in the London Stock Exchange’s Alternative Investment Market (AIM). Many but not all companies listed on the AIM benefit from Business Relief enjoyed by private companies to mitigate their owner’s IHT liability. Business Relief means that if an investor owns a stake in a qualifying company for at least two years and at the time of death then the value of the investment is excluded from their estate for IHT purposes.
Platforms originally evolved from online fund supermarkets which catered for advisers by allowing them to select portfolios of funds or sometimes individual stocks. These platforms initially offered a limited range of funds and larger more liquid stocks. Over time the range of funds and stocks has increased considerably giving investors and advisers more options to invest in. The other trend is for advisers to outsource the portfolio building function to Discretionary Fund Managers (DFMs). This involves the DFM building models for advisers to allocate to. These models are usually designed for a range of client risk profiles or to cater for a particular geographic or sector exposure. The adviser can access these portfolios on Platform through an agreement with a DFM.
To achieve Business Relief on a Platform, it is required to team a portion of the client’s portfolio with the Discretionary Fund Management facility available on many platforms. Having signed an agreement with the DFM, the adviser simply links a portion of the client’s funds to the AIM model portfolio. This leads to an investment directly into a carefully selected portfolio of AIM stocks, which is a direct investment by the investor in the shares, ensuring the investor benefits from Business Relief. An investment cannot be made through a fund or similar vehicle as this would not achieve Business Relief.
Up to now providers of AIM IHT portfolio services have been reluctant to provide their services by Platform and there have been two major reasons for this. First, platform structures make it difficult to invest in small, illiquid companies including those making up about two thirds of the AIM. The second is that AIM portfolios have traditionally been tailored to a lesser or greater extent to the individual rather than there being a single model portfolio.
This has recently changed with a limited number of AIM IHT portfolio providers available on Platform. Puma Investments’ AIM portfolio is for example available on the Ascentric, Standard Life and Transact platforms. Our AIM IHT portfolio is particularly suited for use on Platform. Its existing strategy is to invest only in the more liquid AIM companies with Market Capitalizations over £50m, which are easier to trade on Platform. In addition, Puma Investments only has one model portfolio of twenty stocks, with every client getting the same stocks and in broadly the same weightings. This model portfolio can easily be replicated on Platform.
So if being on a Platform allows the investor to use DFMs, then advisers can potentially access the investment returns of investing in AIM, together with considerable IHT benefits if accessed through the general investment account or the ISA. While pension investors on platform cannot benefit from IHT relief, it may still be attractive for those with larger pots who want to allocate a small portion to higher risk but potentially higher return portfolio of AIM shares.
Justin Waine, Investment Director