The small companies that can help you avoid inheritance tax

This year marks a decade since investors were first allowed to include AIM shares in their stocks and shares Isas. 

For most investors, a major driver of investing in AIM – which stands for Alternative Investment Market, the growth market of the London Stock Exchange – is the chance to mitigate inheritance tax. 

This is because AIM shares are regarded as “unquoted” for tax purposes, and qualify for business relief when the investor dies once they have been held for over two years. 

Jason Hollands, of the investment platform Bestinvest, said: “Shifting Isa portfolios into AIM shares has grown in popularity as part of inheritance tax (IHT) planning strategies given the increasing numbers of people facing the prospect of IHT.” 

Just over 800 companies are listed on AIM, with a median market cap of £397m. 

“There are a vast number of small companies on AIM, so this is a market with a wide universe of opportunities for people who like to pick stocks,” Mr Hollands said. 

He adds, however, that there are plenty of pitfalls to be avoided too. The costs of listing on AIM are lower and the regulatory requirements also fairly relaxed, which means companies tend to be smaller – and riskier. 

Nicholas Hyett, of broker Wealth Club, said investors may therefore choose to invest in AIM via a specialist portfolio (he tips Stellar AIM IHT Isa and Unicorn AIM IHT Isa). 

But if you are picking shares yourself, here are the top picks recommended by analysts.

Fever-Tree 

The producer of premium mixers is one of the biggest success stories to emerge from AIM, and one of just 18 companies to have grown in size to more than £1bn.

Mr Hyett said: “Founder and CEO Tim Warrillow is the company’s sixth largest shareholder, and co-founder Charles Rolls comes in at number five – that’s a big vote of confidence and means managers’ interests are well aligned with shareholders.

“The shares have lost some of their fizz over the last year, but we think that’s taken the valuation down to more attractive levels while sales are expected to continue to tick up – particularly in the US which is a key growth market longer term.”

CVS Group

CVS Group, which has other 500 vet services in the UK, reported strong results in recent years thanks to a pet boom during lockdown. 

Revenue in the six months to 31 December 2022 rose 8.2pc to £296m from £274m the year before. 

Next Fifteen Communications Group 

This marketing consultancy, with a portfolio of over 20 brands, has fostered long-term relationships with huge names including Apple, Google and Microsoft. The group posted revenue growth of 55pc last year and organic growth of 20pc.  

Mr Hyett said: “With a market cap of £991 million and profit before tax of £110 million expected for the 12 months to January 2023, we think this growth stock looks reasonably priced.”

Young’s 

Young’s began as a brewery in Wandsworth in 1831 and has since grown to a major chain operating over 210 pubs and hotels across the country. 

Its revenue grew 24pc to 186m in the six months to September 2022. 

Judges Scientific 

Mr Hyett praised the acquisition strategy of Judges Scientific, a diverse collection of scientific instrument manufacturers. “This has translated to excellent returns on capital and sustained strong growth in the dividend, which has increased at a compound annual rate of 23pc over the last 15 years,” he said.