Take Aim to beat IHT trap
Blessed are the meek, for they shall inherit the earth - if that's okay with the rest of you. So runs the old joke. But for the meek taxpayer, Gordon Brown has other ideas. Inheritance tax (IHT) is a hefty 40% on estates above £285,000.
As house prices rise, more and more people are caught. Say your elderly mother has a house worth £600,000 and investments of £100,000. When she dies, you inherit £700,000 - minus a tax bill for 40% of £415,000 (£700,000 less £285,000).
That is a bill for £166,000, payable by the estate's executor within six months of death. If you were living in the house, you would have to sell all the investments and find another £66,000 to stay in your home.
Not surprisingly, this is causing a growing clamour about IHT. Some used trusts to attempt to avoid it, but this loophole is now largely closed off. David Cameron's Tories may replace IHT with capital gains tax. But the next election could be years ahead.
That has persuaded stockbrokers and wealth advisers to look for a way to minimise the IHT impact on any investments you inherit, by using the tax advantages of shares quoted on London's Alternative Investment Market.
Wearing his other hat as the friend of business, Chancellor Brown allows generous tax reliefs for many Aim shares. They qualify for 'business property relief', which means that, if held for two years, they are no longer part of your estate for IHT purposes (and qualify for a lower capital gains tax rate of 10%, but this article will focus on IHT).
In the example, if your mother's £100,000 investments were in qualifying Aim shares, you would pay no IHT on them, saving £40,000.
Few people would hold all their investments in Aim stocks, which can be risky and volatile. For example, Asia Energy, which has a coal project in Bangladesh, soared from 65p to £9, then plummeted back to 102p. At least with tax, you only lose 40% of your money.
But not all the 1,500 Aim stocks are so risky. Some have moved from the main market, attracted by lower costs and the better tax regime.
Not all Aim companies can save you inheritance tax. They need to have a business; investment companies do not qualify, nor do stockbrokers or property firms. Those quoted on another recognised stock exchange are excluded - which rules out mining stocks also quoted in Canada or Australia.
Sean O'Flanagan at stockbroker Collins Stewart points out that Aim now has more than 175 companies with a market value in excess of £100m.
Some of these are long established and successful groups such as soft drinks seller Nichols, and floor coverings group James Halstead, an Investment Extra tip.
Collins Stewart has put together a portfolio of Aim companies which have a good track record, profits, cash flow and dividends. They include:
International Greetings, which designs gift wrappings and has licences for brands such as The Incredibles. At 432¾p it is valued at £200m, sells at 14 times forecast earnings and yields 2.2%.
Majestic Wine runs a warehouse chain which has ridden high on the boom in wine drinking. At 305½p it is valued at £200m, sells at a steep 18 times earnings and yields 2.6%.
NCC Group (262½p) sells IT services which protect software. Valued at £85m, it sells at 15 times earnings and yields just 1.5%.
Synergy Healthcare (684½p) supplies linen and sterile services to hospitals. Its rating is a steep 25 times earnings, yielding 1.2%.
James Halstead (466p) is one of the best, valued at £238m, 21 times earnings with a 2.6% yield. It is growing strongly.
No one should put all their savings into smaller companies but, if you think inheritance problems loom, putting some funds into Aim stocks could help.
Collins Stewart (020 7523 4509), like other brokers, will run a portfolio for you for a 1.5% annual charge, plus £40 when you deal.
Sensible use of Aim's tax advantages could be a boost to your heirs. They may not inherit the earth but, with a little tax planning, they could inherit rather more than otherwise.
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