Aim shares can allow you to avoid inheritance tax. But what if a firm leaves Aim?

If one of their Aimquoted holdings decides to quit the junior market, investors may need to act quickly

THIS column has frequently highlighted the inheritance tax benefits of buying certain Aim stocks: as long as the shares meet certain criteria and are held for two years before death, no IHT will be due. But what happens if you buy such a share and it later ceases to be quoted on Aim?

This can happen if the company decides to move to the main market, is taken over by or merges with a fully listed group, or opts to dispense with a stock market quote altogether and returns to being a private firm.

To deal with the most straightforward possibility first, if an Aim-quoted stock decides to delist and become a private business, its eligibility for the IHT tax break (officially called “business relief ”) is unaffected and investors need do nothing – although they

are of course likely to find their shares much harder to sell in future.

Aim stocks are eligible for the tax concession because they are, from a legal point of view, “unlisted”; you have to be on the main market to count as “listed”. Hence a switch from an Aim quote to being a private company makes no difference to a firm’s “unlisted” status.

The position is more complex if a company moves from Aim to the main market but the principal piece of advice for shareholders is simple enough: sell the shares before the move takes place.

Otherwise you lose all the relief. There is no provision in the rules to say that if you die, say, a month after a firm has moved to the main market and you had therefore held qualifying shares for one year and 11 months of the two-year period required, you get 23 24ths of the relief.

Once you have sold shares that are about to leave Aim, reinvest the proceeds in other qualifying stocks as soon as possible. It’s true that in theory the rules give you plenty of time to do so – the exact stipulation is that you must have owned qualifying assets for a total of two out of the five years preceding death. But no one knows when they are going to die, so it’s best to reinvest the money in other Aim shares straight away.

There are further rules: you must reinvest all the money and it must be the “same” money: there must be a clear connection between the cash raised from the sale of the original Aim stock and that used to buy the new shares.

This means, for example, that you cannot sell the first share, use the proceeds to invest in something else, then borrow other money to buy qualifying Aim shares. Investors should ensure they keep evidence that the “same” money was used to buy the new shares and that their executor has access to the relevant documents.

If an Aim firm is bought by a fully listed company the same rules apply, but make sure you sell the shares before the transaction becomes “unconditional” – don’t wait for the actual completion of the deal, advised Chris Boxall of Fundamental Asset Management, an Aim specialist.

A high-profile Aim stock did leave the junior market recently, although it is to be hoped that no readers had held it for inheritance tax reasons.

Plus500, the financial betting business, migrated to a full listing last month. But it was not a qualifying stock for IHT relief even when it was quoted on Aim, because of its involvement in investment business.

There are other important exclusions, which we have mentioned before. But the details can be extremely complex. HM Revenue & Customs has a useful guide online at gov.uk/business-relief-inheritancetax, but if you remain in any doubt it is worth seeking advice from a tax expert who is familiar with this area.

Income Portfolio update: Paragon bonds

Questor’s Income Portfolio holds retail bonds issued by Paragon, the specialist lender, which issued a trading update on Monday.

There were no detailed figures but the loan book grew, with especially strong performance in buy-to-let, and the firm said trading was “in line with the board’s expectations”.

Capital reserves remain strong and above the group’s target, while the cost of funding via retail deposits fell slightly. There is no reason to doubt the lender’s ability to meet its interest and capital repayment obligations and the bonds remain a hold.