Aim stocks to beat death duty

By Michael Clarke
Updated:

 

The Chancellor doesn't give much joy to people facing large Inheritance Tax bills, but one area where he does show his generous side is with companies listed on the Alternative Investment Market.

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Aim shares qualify for 'business property relief', which means that if they are held for more than two years, they are no longer part of your estate for IHT purposes. This offer's a potential 40% saving on the value of the estate over the £285,000 IHT threshold.

But investing on Aim is not everybody's idea of fun. The market had a tough time last year and an influx of poor listings has dented confidence in the index. Aim stocks don't have to meet the tough regulatory rules as those listing on the main index, which has also fuelled doubts about the quality of the companies.

Aim was set up in 1995 to give companies access to the UK stock market at an earlier stage in their development. This means that they are often seen as high risk with potential rather than household brands of long-standing.

But investors could be missing out if they decide to ignore the index completely because there are some quality companies operating in the market.

Anthony Scott, Aim expert at stockbroker Charles Stanley says: 'Recent criticism of Aim risks frightening investors unnecessarily away from some substantial investment opportunities. It is said that there are some fishy stocks on Aim, but there are many excellent companies as well.

'The whole purpose of Aim is to provide a market for small companies which by their nature are higher risk than large cap stocks. The Government acknowledges the higher risk nature of Aim by providing generous tax incentives to investors.'

Investors can either buy Aim stocks directly or buy into one of the IHT Aim portfolios offered by stockbrokers. Managers of these portfolios will scour the Aim market to pick that they regard as high-quality stocks, but investors tend to be high net worth individuals due to the high minimum contributions required.

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For example, Collins Stewart requires a minimum investment of £100,000, Charles Stanley asks for £50,000, while Killik & Co requires investors to put in £30,000. Another reason is the costs involved – Killik charges 2% plus Vat upfront and then an annual management charge of 1.5%, plus normal dealing costs, while Charles Stanley charges 1% upfront and 1% per year.

The portfolios aren't like a traditional unit trust fund where all investors' money is pooled – they are managed on a discretionary basis for each individual's requirements. Managers will choose from a core holding of stocks, typically up to 80 companies, and will build a portfolio of between 10 and 30 companies.

Although the primary aim of the portfolios is to help avoid hefty IHT bills, performance is also key and so far most portfolios have performed pretty well. For example, Collins Stewart has returned nearly 17% for its larger Aim portfolios since launching the service in April 2006. Meanwhile, Anthony Scott of Charles Stanley says that the first person to invest in its portfolio has turned £500,000 into £833,000.

The average Killick & Co portfolio returned 22.3% in the final quarter of the year, its first full quarter of operation. Private client advisor Hannah Eve Edwards said: 'There has been falls in the second and third quarters so we launched at the perfect time when there was value in the market. We had some portfolios grow by nearly 30% in the final quarter alone.'

Other companies that offer IHT Aim portfolios include Pilling & Co, Close Brothers and Brewin Dolphin.

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Another benefit of holding Aim stocks is that after the qualifying period Capital Gains Tax falls to 10%. However, not all Aim stocks qualify for 'business property relief', so if you are planning to build your own portfolio, make sure the shares you are purchasing do.

Another downside is that if you die within the two year period any tax benefit could be lost, while the Aim market can also be illiquid making it difficult to extract cash. Aim stocks can also move to the main market or lose their 'business property relief' status if their business changes.

We asked Killik & Co and Charles Stanley for their favoured stocks for inclusion in an Aim IHT portfolio.

Killik & Co – Malcolm Cuthbert managing director of financial planning

Dobbies Garden Centres
Develops and operates garden centres across the UK. The company's centres provide gardening and landscaping materials, in addition to selling gifts, glassware, books, candles, outdoor clothing, furniture and specialty foods.

Domino's Pizza
Hold the exclusive master franchise to own, operate and franchise Domino's Pizza stores in the UK & Ireland. Domino's also operates pizza delivery stores internationally.

Mears Group
Provides mechanical and building maintenance support services to local and other regulated authorities and private sector organisations in the UK. The company's services include building, gas and air conditioning maintenance and electrical servicing and maintenance. Mears primarily serves the public sector including contracts with British telecom, the Post Office and Royal Mail.

Target Aim Mod

Spice Holdings
Support services business focused on utilities and facilities management. The group delivers and co-ordinates infrastructure services within the electricity, water, niche telecoms and public sectors.

Young & Co
Brews and bottles beer. The company also sells wines, spirits and cider through its public houses, hotels and restaurants. Young's brand names include Special, Double Chocolate, Oregon, Winter Warmer, Ram Rod, London Lager, London Ale, Light Ale, Old Nick and Porter.

Charles Stanley – Anthony Scott, Aim investment manager

Dobbies Garden Centres
An exceedingly well-managed retail business mainly in the north of England and Scotland which is building up its assets.

Finsbury Food Group
A former cash shell which over five years has developed into a successful bakery business. Shareholders will soon vote on a £37.5 million takeover of the bakery chain Lightbody Group Ltd. Lord Maurice Saatchi, its non-executive chairman, is a significant shareholder but will resign the chairmanship following the takeover.

James Halstead
A commercial flooring firm, established in 1915, awarded the Queen's Award for Enterprise in 2004.

NWF Group
This provider of grocery warehousing and distribution, animal feeds, fuel delivery and garden centres was the 52nd company quoted on AIM, back in 1995. Since then it has grown its core business and expanded into new markets with great success.

Stanley Gibbons
The internationally renowned philatelist has been dealing in collectible postage stamps since 1856 and joined AIM in September 2000. It therefore has demonstrable expertise in a highly specialised business.

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