It’s no secret that the Chancellor has inheritance tax in her sights for November’s Budget. More families than ever will end up paying the 40 per cent tax in the coming years, due to frozen thresholds and pensions being dragged into the net.
This means those at risk of a painful inheritance tax (IHT) bill are increasingly turning to new solutions to dial down their tax liability.
One possibility to lessen the pain is a portfolio made up of AIM stocks. Stocks listed on this smaller investment market have traditionally qualified for total inheritance tax relief if they were held for just two years before the death of the owner.
From April, that’s no longer the case, which has led to reductions in the value of AIM stocks. However, the shares do still come with a significant perk for those worried about IHT.
Instead of paying 40 per cent IHT on these stocks, your estate will pay half this rate – 20 per cent – provided the shares qualify at the time of death and have been held for a minimum of two years.
The fall in value due to the change means that some of the best companies on AIM come with a ‘double bubble’ – great businesses at low valuations, but with a possible IHT saving to boot.
If you snap them up now, you could end up with a good deal, as well as the potential to reduce a family bill.
Darius McDermott, managing director at Chelsea Financial Services, says that an ‘indiscriminate sell off’ has left many businesses listed on the market at ‘highly attractive levels’. Those who invest in AIM should be wary though. AIM stocks are less researched and riskier than those on the main market.
Rachel Reeves has inheritance tax in her sights for November’s Budget
Jason Hollands, managing director at BestInvest, warns, there has been ‘no shortage of blow-ups as well as success stories’ on AIM. ‘AIM companies are very unresearched by banks and brokerages, so it is essential to do your own thorough homework before investing,’ he says.
Although the number of estates that pay IHT is growing, it is still just one in 20 so yours may not face a bill at all. Everyone has several allowances that allow you to pass on some wealth free of inheritance tax. If you’re considering measures to cut a potential bill, you could be worth getting expert advice first.
Another word of warning – don’t hold AIM stocks in your pension hoping for relief, as changes to the rules mean that the IHT discount won’t count there. Pop them into your Isa instead.
Here are four to consider.
Journeo
Up 57 per cent already this year, intelligent transport systems provider Journeo hit the headlines this week when it snapped up security business CFDS in a cash and shares deal.
The acquisition announcement led to an earnings upgrade, with £4million more revenue and £0.4million more profit than was previously expected by the market.
Journeo provides those display boards on buses that tell us about the next stop, automatically counts the number of people getting onto public transport of all forms, and runs the security systems at stations. The company’s digital wing mirrors help improve visibility for bus drivers, eradicate blind spots, and reduce the risk of collisions and accidents.
Customers include First Bus, Dublin and Bradford Airports, and as well as providing these systems and products, Journeo has the contracts to maintain and replace them, providing visibility when it comes to profit.
Dan Coatsworth, investment analyst at AJ Bell, says it stands out as a ‘profitable business with momentum’. ‘Acquisitions have opened doors to new opportunities,’ he adds.
The company is still small, with a market capitalisation of under £79million, but – like the buses it is serving – it is going places. Buy.
Traded on: AIMÂ
Ticker: JNEO
Contact: journeo.com
James Halstead
Flooring business James Halstead has been on a slippery slope for a while, thanks to supply chain difficulties caused by the Ukraine war as well as the issues surrounding AIM and IHT relief.
At £1.45 this week, the shares are down 43 per cent from where they were five years ago, which represents a value at which it might be worth snapping up the family-run company. Halstead, which began as a manufacturer of raincoat fabric in damp Manchester back in 1915, is still run by Mark Halstead, the great-grandson of the founder, who keeps the company on a steady financial footing.
Learning from the past, when the company became over indebted in the 1970s, it now holds a huge stash of cash and is popular with those seeking dividends, as it has increased its payout to shareholders every year for nearly half a century.
Nicholas Hyett, investment manager at Wealth Club, describes the company’s balance sheet as ‘a fortress with £60million of cash in the bank and no debt to speak of’.
That means that although Halstead faces uncertainties around US tariffs, it should be able to weather a storm and invest in recovery. Buy.
Traded on: AIMÂ
Ticker: JHD
Contact: jameshalstead.com
Young’s
Lamb Tavern in Leadenhall Market in London is a Young’s pub
The 193-year-old pub company Young’s has had a tough time of late. Problems have included the pandemic and rising costs for hospitality employers brought about by inflation and the hike in National Insurance and the minimum wage. However, as Hyett, at Wealth Club, points out, the company has seen bad days before and come through and its strong property portfolio in expensive locations in London and the South East gives it premium pricing power and is hard to replicate.
This is one for the long-term, as it is still partly family owned so unlikely to be selling out any time soon. Hyett suggests that the non-voting shares, which trade on a lower valuation than the voting shares, are the ones to buy as they also offer a higher yield, currently about 2 per cent.
Traded on: AIM
Ticker: YNGN (non-voting)
Contact: youngs.co.uk
Craneware
Edinburgh-headquartered Craneware provides billing and financial software for healthcare businesses, mainly in the US.
It serves around 40 per cent of registered hospitals in the US and its flagship product is the Trisus Chargemaster, which provides all the information needed to generate patient bills, process insurance claims and ensure accurate coding and pricing for services. The company has just refinanced after rejecting a bid from US private equity firm Bain, which the founders said undervalued its prospects. Now it needs to deliver for its shareholders in a way that mollifies them for rejecting a £26.50 bid, when the shares are now at just over £21.
A recent update shows that the company is well on the way, with revenues and earnings above analyst expectations. In the company’s favour is its partnership with Microsoft, which provides more visibility for its products.
Analysts believe that, although the US market is obviously uncertain, the fact that Craneware’s product saves costs for hospitals means it will remain popular – the company estimates it saves clients $1.5 billion a year. It also has very strong customer retention.
Analyst Harvey Robinson, at Panmure Liberum, has a buy on the stock.
He believes that, despite the rejection of the Bain bid, the company would still be a tasty morsel for a larger US business, while if it isn’t, the customer base and potential growth in the business is also good news. Buy.
Traded on: AIMÂ
Ticker: CRW
Contact: thecranewaregroup.com
Navigate AIM and IHTÂ
AIM shares have traditionally enjoyed relief from IHT due to something called Business Property Relief (BPR), originally set up to allow families to pass companies down the generations.
The scope was later widened to include certain AIM stocks, but Chancellor Rachel Reeves hacked this back in her Autumn Budget last year.
The relief will only give you a 20 per cent IHT tax rate on qualifying AIM stocks from April next year, rather than the total relief at present.
Not all AIM stocks qualify, which is also an issue for those investing, who should check that the AIM stocks they are buying hit the criteria. To qualify, companies must be trading businesses, and not primarily deal in investments, securities, land or property. That means you should expect to have to pay inheritance tax on AIM listed investment trusts and REITs (Real Estate Investment Trusts).
Some mining and oil & gas companies might attract IHT too. What’s more, the decision is not made until the point at which IHT is payable, so you can’t ‘lock in’ the IHT savings early.
AIM stocks won’t qualify for IHT relief if they are in a pension, so if you’re buying them with even half an eye on potential relief at the end, put them in an Isa instead.
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