AIM IHT ISAs – an attractive option for IHT-relief seeking investors?

On 5 August 2013 investors were allowed to hold AIM shares in an ISA for the first time.

This seemingly small change in ISA rules has far-reaching consequences for investors with sizeable ISA pots, as it effectively makes it possible to pass ISAs on tax efficiently.

Conventional ISAs – so tax-efficient during one’s lifetime – can incur up to 40% inheritance tax (IHT) if bequeathed to anyone other than a spouse or civil partner.

In contrast, certain AIM shares can qualify for Business Property Relief (BPR) and hence benefit from IHT relief, provided you hold them for at least two years and on death.

So, if you have an AIM IHT ISA (a portfolio of qualifying AIM shares held in an ISA), under current rules you can pass it on with no IHT to pay on death. From 6 April 2026, the rate of IHT tax relief will reduce from 100% to 50%. Remember, tax rules can change and benefits depend on circumstances.

There are two reasons why experienced investors could consider AIM ISAs.

Firstly, more and more families are being dragged into paying IHT – the result of high inflation and property values, combined with long-frozen allowance thresholds. Rising property prices, in recent years, have meant more estates than ever are likely to face an inheritance tax bill. Indeed, IHT is forecast to bring in a record-high £7.5 billion in the 2024/25 tax year – £9.7 billion by 2027/28.

And this is before taking into account the changes to IHT-free allowances and IHT relief announced in the Budget in October 2024.

Secondly, over the past 10 years, AIM has come of age, potentially becoming more attractive to IHT-relief-seeking investors.

Once regarded as a poor-quality market filled with small, early-stage and highly speculative companies, AIM is now home to an increasing number of larger, more mature, often dividend-paying, BPR-qualifying businesses.

In 2013, six companies had a market capitalisation of more than £1 billion, four of them were oil & gas companies. The average market capitalisation of the top 50 stocks on the market was nearly £590 million.

Over a decade later, seven companies were valued at over £1 billion, none of which were in the oil & gas sector, and 32 topped £500 million (August 2024). Despite the market’s growing maturity, though, AIM shares are still considerably riskier and less easy to sell than those listed on the main market.

It’s been a difficult couple of years for AIM, and smaller companies more widely. But the result is that AIM valuations are close to 10-year lows. This could make AIM attractive to experienced investors comfortable with the higher risks – you should form your own view.

If you have the time and inclination, you could research and select AIM-quoted shares that qualify for BPR and build a portfolio yourself.

Alternatively, there are reputable and experienced asset managers that offer ready-made AIM IHT portfolios. They each bring highly regarded specialist expertise – and very different, albeit complementary, investment strategies and could be a consideration for experienced investors who have other investments to fall back on, as AIM shares are high risk.