Taking AIM

The headlines following the 2024 October Budget were dominated by news that from April 2027, pensions will be included within an individual’s estate for inheritance tax purposes. We are still awaiting the final details on how this will work in practice. While this news may make pensions slightly less attractive for intergenerational planning, they   a crucial component of most clients’ financial strategies (see related article: Riding the waves).

The same principle applies to the attention-grabbing tax changes applying to shares listed on the Alternative Investment Market, commonly referred to as AIM shares, specifically the 50% reduction in inheritance tax relief. AIM shares went from being fully exempt from inheritance tax (if held for at least two years on death), to now being taxed at 20% once the changes come into effect in April 2026.

However, like pensions, we still believe that AIM shares can play a role as part of a client’s financial plan. Let me explain and I’ll start by outlining what the AIM market will look like post-April 2026:

• There is no upper limit on the amount that can be invested.
• Investments can benefit from a reduced inheritance tax rate of 20% if held for two years and upon death.
• The investment supports smaller UK companies with high growth potential.
• Investors retain access to their funds should circumstances change.
• These investments can be held within tax efficient products such as ISAs.

If you compare the existing tax benefits of AIM shares to those after April 2026, on the surface, they may seem less compelling. However, it’s crucial to look beyond the tax changes and focus on the bigger picture. AIM shares still offer a unique combination of growth potential, flexibility, and tax efficiency. Yet some don’t share this view.

In psychology, this phenomenon is referred to as ‘anchoring’. People often interpret new information through the lens of what they already know. Because the AIM market was previously fully outside an estate after two years, the new 20% inheritance tax rate can feel like a step backward. But let’s shift that perspective.

The reality is that, even with the changes introduced in the Budget, the AIM market remains an effective tool for inheritance tax mitigation given the benefits of:

Significant tax savings:

While the full exemption may no longer apply, a reduced rate of 20% still represents a substantial saving compared to the inheritance tax rate of 40%. For example, a £200,000 ISA invested in non-AIM assets would result in an £80,000 inheritance tax liability if over the tax threshold. Should this amount instead be invested in qualifying AIM shares, the liability would halve to £40,000.

Accessibility and flexibility:

Unlike most other inheritance tax planning strategies, AIM investments allow investors to retain access to their funds. This flexibility is crucial for individuals who wish to retain control over their assets.

Alignment with investment goals:

The AIM market offers a chance to invest in smaller UK companies that are often innovative and ready to grow. While these shares can be volatile and high-risk, they present an exciting opportunity for those who want to support the UK economy and potentially enjoy higher returns.

Tax efficiency via ISAs:

AIM shares can still be held within ISAs, combining income tax and capital gains tax advantages with the inheritance tax benefits.

Despite recent changes that may have deterred some investors from the AIM market, it continues to be a powerful and flexible option for those looking to manage their inheritance tax liabilities whilst also supporting the growth of UK businesses.

As with any investment decision, seeking professional advice is important to ensure this strategy aligns with your overall financial goals. However, the AIM market is a worthy consideration in 2025 and beyond.

This article is intended as an information piece and does not constitute investment advice.