Today’s post is about Safe AIM stocks that we can use as part of a portfolio that will be exempt from Inheritance Tax. Do such things exist?
Last week we looked at tax planning for my 83-year-old mother-in-law (MIL), who is selling her flat to move near her daughter.
As she won’t have enough money to buy in the new area and fund her living expenses, she will have to rent.For the first time in 30 years she will have some liquid assets that lend themselves to tax planning.
We decided last week that one part of her strategy should be a portfolio of Safe AIM stocks.
After two years these can be passed on without paying inheritance tax (IHT).The £325K nil rate band and the primary residence nil rate band should take care of the rest of her eventual estate.1
We’ve met AIM before:
we looked at its history, and the diversity of stocks listed there. We’ve run a small portfolio of AIM stocks for just over a year to get to know the market better the portfolio outperformed the FTSE-All share index by more than 25% in its first year.
So we’re not scared of AIM, although a couple of years ago I would have been surprised to be suggesting that someone in their 80s consider it as an investment.
BUSINESS PROPERTY RELIEF
The “loophole” is that AIM stocks qualify for Business Property Relief (BPR).
This is slightly strange, given that one of the requirements for BPR is that the company shares be “unlisted” (however, I won’t be complaining).
Nevertheless, after two years of ownership, BPR assets are exempt from IHT.
Even worse, HMRC don’t maintain a list of which AIM stocks do qualify, so you have to use your own judgement.Basically HMRC assess the company at the time of exemption (during probate), and a company that qualifies today might not be eligible in the future if its activities change.
Fundamental Asset Management looked at the 1,087 companies listed on AIM in 2014 and found that 727 qualified – that’s 67% or two-thirds of firms.
Things to look out for include:
- a second listing on a market other than AIM (although some other foreign ’emerging stocks’ markets also count as unquoted)
- dealing in shares or property or land, or making investments watch out for sale and leaseback property deals here
- oil and gas exploration
- too much activity outside of the UK
- companies that are about to be sold to another firm (taken over) or wound up
There’s one twist to the two-year rule that is worth pointing out.
You can sell qualifying shares and replace them with other qualifying shares and the 2-year clock will not be reset.
This could be very useful if some of the companies we choose cease to be qualifying in the future (eg. due to a takeover or moving from AIM to the main market).
Even better, these replacement shares only need to be bought within three years of the sale.
You would of course need to have bought the replacement shares before you die.And you need to have sold the original shares before the change in circumstances actually happens (ie. sell on the announcement).
A few investment managers exploit this uncertainty by offering IHT portfolio of AIM stocks which they guarantee will qualify for BPR.
Minimum investments are generally in the £10K to £50K range, which is not a problem here.
Unfortunately they charge 1-2% up front and 1-2% pa for this service, as well as internal dealing charges on the portfolio churn.
As we’re looking to invest upwards of £300K into this solution, that’s probably £10K for year 1 and £5K for subsequent years.
For that kind of money I can do the work myself.
SAFE AIM STOCKS
We will have around £300K to invest, so ideally I would like to find 40 to 50 stocks to go into the portfolio.
At a pinch we could manage with 30, which would give a position size of £10K per stock.
At this stage I’m not too concerned about current valuations, which feels a bit odd.
If we end up with more than 50 stocks to choose from, valuation will come into it.
The prime considerations are, in order of importance:
- will this firm be around in ten years?
- is it a family firm (likely to remain on AIM for the IHT benefits)?
- can it be expected to grow at least in line with the UK economy?
- is it a household name?
- does it pay a dividend?
- will it migrate to the main market – or be taken over – in the next few years
Today is just a triage process, and I’ll be classifying stocks as Yes / No / Maybe.
Later on we’ll look at valuation, and at optimising the portfolio by getting a good spread of sectors and industries.
My primary source for the work I’m starting today is the Investors Chronicle’s annual AIM 100 survey.
This is an annual brief commentary on the 100 largest stocks on AIM.Unfortunately I’m using the April 2015 version as this year’s articles are still behind a pay wall that I’m too much of a cheapskate to unlock.
At the end of the process I’ll match the firms to the current AIM-100 list on the London Stock Exchange web site, and look at any that we’ve missed.
I had also planned to use the Investor’s Champion site, which maintains a list of BPR qualifying AIM stocks.
The registration process for the site is a bit more tedious than most, but you only need a free registration to access the basic data
searches on the AIM IHT site (a separate tedious registration) require paid credits (a minimum of £2 per company).
But the IC list of qualifying companies is suspiciously short (probably less than 200), so I will revisit qualifying status later.
Let’s get started.
1 TO 16
ASOS – apart from the price, it’s all good – YES
GW Pharma – this is the cannabis stock, so again price is ludicrous and it’s a risky sector, but still – MAYBE
Abcam – pricey medical proteins group, we won’t want too many of these, but it does pay a small dividend – MAYBE
Optimal Payments – this firm changed its name to Paysafe and moved to the main market, so it’s no longer eligible – NO
PureCircle – another speculative stock, making a sweetener from stevia, though it has good customers and is profitable – MAYBE
Plus500 – an Israeli CFD company (like spread-betting), but a profitable one paying a dividend; may not qualify – MAYBE
James Halstead – this is the kind of firm we want: family owned commercial floor company with profits and dividends – YES
Hutchison China Meditech – expensive unprofitable Chinese pharma with potentially good prospects – MAYBE
Vinacapital Vietnam Opportunities – this is an investment trust, so won’t qualify – NO
EMIS – expensive “connected healthcare” group looking after prescriptions and patient records, profitable and paying a dividend – MAYBE
Secure Trust Bank – challenger bank, profitable and dividend paying – MAYBE
Dart Group – Airline (Jet 2), profitable and paying a dividend – MAYBE
Mulberry – struggling fashion group (handbags) , but household name and paying a dividend – YES
Quindell – possible fraud scandal and sale to an Australian firm of lawyers since last year – NO
Breedon Aggregates – consolidator of fragmented aggregates industry, this is more the kind of thing we want – YES
Clinigen – diversified pharma and biotech business, loss-making – MAYBE
It’s time for our first breather.
We have four stocks we like, unfortunately from only two sectors (clothing and building materials). We’ve ruled out three stocks. We have nine maybes.
Here’s how my updated table looks at the moment:
17 TO 33
Young’s brewery – family firm, profitable and paying dividends, of which I am a regular customer – YES
Nichols – the Vimto manufacturer, another family firm and household name – YES
Summit Germany – property management in Germany, so non-qualifying – NO
Safecharge International – Israeli-owned payment solutions to online gambling, so not my first choice of sector – MAYBE
Monitise – loss-making online payments firm – MAYBE
New River Retail – regional shopping centres, so not allowed – NO
Impellam – recruiter, including Blue Arrow and Lorien – MAYBE
Polar Capital Holdings – asset manager, so probably not allowed – NO
RWS Holdings – patent translation and filing, looks interesting – MAYBE
Redde – accident support services – MAYBE
OPG Power – Indian electricity producer, so probably not allowed – NO
Avanti Comms – loss-making satellite company, mostly foreign operations – NO
Amerisur – Colombian Oil and Gas, so probably not allowed – NO
CVS Group – vets chain and animal labs – MAYBE
Smart Metering systems – should have good prospects, given government intentions for next five years – MAYBE
BooHoo.com – online fashion stock that I already hold – YES
Burford Capital – litigation finance and insurance (may be classed as an investment trust and not qualify) – YES
Time for another breather.
We did a little worse this time:
We have four more stocks we like, from a slightly better spread of sectorsWe’ve ruled out six more stocks.We have seven maybes.
Here’s how the updated table for this batch looks:
So from the first 33 stocks on AIM, we have:
8 stocks we want, 9 we don’t want or can’t have and 16 maybes
I’m going to leave it here for today.
Next week I’ll be back with a different approach.
The lack of a definitive list of qualifying companies has rattled me a little.
I plan to search through all the prospectuses and reports from those firms offering IHT portfolios, as well as all the newspaper and magazine articles on the topic, to produce a list of AIM firms that are definitely ok for BPR and IHT exemption.
The opposite approach from today – bottom-up instead of top down.
Until next time.
- She is eligible for the primary residence nil rate band despite not owning a property, since she will have sold her last one after July 2015 when the legislation was announced – this is intended to encourage downsizing by the elderly
- This is to help calm family members who are not as familiar with the AIM market as I am
- Note that ASOS for example is not listed as eligible on the Investors Champion site, so this will need further investigation
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