16/8/2023

Business Relief: Looking at your options when investing in AIM and estate planning services

Stephen Packter, Business Development Manager at Beringea, explains what the options are to access business relief and the key differences between them

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:

- an estate planning service such as the ProVen Estate Planning Service (PEPS); or  

- shares in trading companies listed on the AIM Market of the London Stock Exchange.

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. Shares in investments that qualify for business relief can be passed on to family or loved ones after your death free from inheritance tax, provided that they have been held for at least two years at the time of death.

Married couples and civil partners also have the benefit of a joint two-year qualifying period. This means that should the investor die within two years of investing, the investment can be transferred to their surviving spouse or civil partner without resetting the two-year clock.

Business relief therefore appeals to UK taxpayers looking to reduce their inheritance tax liability within 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 investment, 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 to invest in a service that offers a wider range of private companies - and we discuss these two options below.

AIM portfolios

AIM is the London Stock Exchange's market for small and medium sized growth 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 provided the shares are held at the time of death.

To qualify for business relief, a company has to be a trading company and must not be listed on a main stock exchange. Business relief is effectively lost where a company is found to be wholly or mainly operating as an ‘investment company’. 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, then an estate planning service such as the ProVen Estate Planning Service (PEPS) could offer an alternative to investing in AIM stocks. As well as offering the potential for mitigating inheritance tax, an investment in PEPS aims to offer predictable returns as we target capital preservation rather than purely focusing on high growth.

PEPS was launched to offer clients the opportunity to invest in companies that should be eligible for business relief, in order to benefit from inheritance tax relief. The service is managed by Beringea and builds on Beringea’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 aims to offer target returns of 4-5% a year (on your net investment, after charges). 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 the targeted 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). As with all investments of this type, PEPS can not make guarantees in respect of an investment in the service. Based on the strategies of the companies in which PEPS invest, the returns over the medium term are considered to be realistic targets. However, past performance can not be a guide to future performance.

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, a 1% withdrawal fee and Beringea’s discretion).

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 deemed very high risk strategies by the Financial Conduct Authority (FCA).

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.  

Investors should always consult a regulated financial adviser before considering one of the above options.

This article is for UK residents interested in finding out more about inheritance tax. The explanation the tax rules set out in this article have been written in accordance with our understanding of the law and interpretation of it at the time of publication. It is not our intention to offer legal, tax or investment advice, and we always recommend that investors seek professional advice that can take account of their personal circumstances before making any investment or estate planning decisions.

Important notice: issued by Beringea LLP of Charter House, 55 Drury Lane, London, England WC2B 5SQ, registered in England & Wales number OC342919 and authorised and regulated by the Financial Conduct Authority, number 496358.

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The ProVen products are managed by Beringea, a specialist award-winning venture capital firm. If you have any questions contact us at:

020 7845 7820 | info@beringea.co.uk

020 7845 7820
info@beringea.co.uk

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