How to invest in Aim stocks (and save thousands on inheritance tax)

A risky, but potentially rich, hunting ground for investors looking for cutting-edge businesses to back can be found on London’s junior market, the Alternative Investment Market (Aim).

This is home to some of the most exciting and innovative smaller businesses in the country. The Aim is comprised of thousands of fast-growing technology, healthcare and environmental companies run by entrepreneurs. 

Returns can be higher and come more quickly than larger, older companies. The added perk is the potential for shares to be completely free of inheritance tax.

Companies like package holiday seller Jet2 and the video games support company Keyword Studios – today worth more than £1bn – have shone a light on the diamonds in the rough that can be discovered if investors are brave enough to mine less-researched businesses.

There are many other success stories.

The value of Aim-listed Sondrel more than doubled recently following reports it played a key part in Elon Musk’s Neuralink brain chip. Sondrel assisted with semiconductor technology that allows Neuralink’s implants to function. Sondrel is one of only a handful of firms capable of supplying the higher-spec chips required – with the share price of the Berkshire firm soaring 117pc since the start of the year.

So, how do the tax breaks work? What are the risks – and what should you buy? 

Tax perks

As with shares listed on the main market, Aim shares can be placed within an Isa or pensions, which protects gains from tax. Some Aim shares come with extra tax benefits for investors with an eye on estate planning. After two years of holding qualifying shares, you should be able to pass them on without a penny due in inheritance tax (IHT) – charged at 40pc over the £325,000 threshold.

Unlike other forms of inheritance tax planning, you keep hold of your money (and control of it) rather than having to give it away before you die.

If there is a sudden market dive, Aim stocks will need to fall 40pc more than other investments to cancel out their IHT benefits.

Investing in Aim has become more attractive with increasing numbers of estates falling into the web of inheritance tax. 

The latest HMRC figures show £6.3bn in inheritance tax receipts were collected in the 10 months from April to January 2024. This is £400m more than in the same period just one year earlier.

The risk factors

While the Aim is home to thousands of success stories there are no guarantees a company will prosper.

Smaller firms suffer in downturns and many Aim-listed firms have struggled and failed. 

Unlike the main market there is no minimum size requirement or trading record. This means that there is more risk than investing in larger, more established companies.

Jason Hollands, of stockbroker Bestinvest, said: “The Aim market has a bit of a wild west reputation as it has lighter touch rules than the main market, stocks are often very small and illiquid and Aim shares have very little scrutiny by stockbroking analysts.”

Another risk for those planning to use Aim investing to minimise inheritance tax is that the tax benefit will be scrapped.

Some reports have suggested the Labour Party is considering tightening or scrapping “business property relief”, the inheritance tax relief that applies to Aim, as part of a wider closing of tax loopholes.

There is even uncertainty around the future of inheritance tax itself. There have been rumours that the Government might be looking at scrapping the tax altogether to win votes – which would negate the need for Aim shares. This could of course be damaging for the market and existing investors. 

Laith Khalaf, head of investment analysis at AJ Bell, warned: “There’s a fair amount invested in the market on the basis of its inheritance tax treatment, so if this suddenly became surplus to requirements, there would be a fair wedge of cash leaving the market, which could knock share prices.”

Inheritance tax matters aside, the flip side of investing in smaller riskier businesses is that when an economy starts to recover, the growth of smaller companies is often faster than larger rivals.

Many fund managers like Aim companies for their ability to be nimble in changing markets and look for firms with strong balance sheets that can keep growing their businesses.

How to invest in the Aim

You can buy Aim shares for your Isa in the usual way, using an Isa and pension platform such as Fidelity or Hargreaves Lansdown.

AJ Bell, another stockbroker, said the most popular Aim stocks held by its customers included mining companies such as:

• Greatland Gold, which deals mostly in gold and copper deposits
• Sylvania Platinum, which finds platinum, palladium and rhodium, 
• Premier African Mining a UK-based mining and exploration company, operating primarily in Africa

Helium One Global is also in the top 10 most popular. This company explores, develops, and produces low-carbon helium. Helium is used to make semiconductor chips and cool cloud computing data centres, among other things. 

Another favourite is life sciences company Avacta, a cancer treatment specialist spun out of the University of Leeds, as well as “fast fashion” retailer Boohoo.

It’s important to be forensic in your selection if you want the inheritance tax-free benefits, however, as not all Aim stocks qualify for the relief. A particular challenge is that their status can change over time and it is only on death that HMRC will decide whether or not a share qualifies. The company must be a “trading” business and not essentially be making investments, in shares or land or buildings, in its own right. 

As an alternative, you can open a specialist Aim Isa – a ready-made portfolio managed by a professional. 

Managers such as Octopus (the largest), Stellar, Unicorn, RC Brown, Downing, Puma, Whitman and Dowgate provide Aim Isa portfolios. 

To set up an Aim Isa you’ll need to use a broker such as Wealth Club, a financial adviser or wealth management service such as Evelyn Partners – or go direct to the manager.

Nicholas Hyett, investment manager at Wealth Club, said: “An Aim portfolio manager will invest in 30 or more qualifying Aim companies on your behalf, giving a more diverse portfolio than you might achieve on your own, and hopefully also delivering better investment performance.”

Among the most popular Aim portfolios at Wealth Club are the Octopus Aim IHT Isa and Unicorn Aim IHT Isa. 

Octopus focuses on large, growth focussed companies. “This has been a real headwind in recent times and performance has been disappointing,” said Mr Hyett.

“However, their scale brings significant operational advantages and the portfolio should be well placed if the market turns in favour of larger, fast-growing names when interest rates peak and go into reverse.” 

Companies Octopus invests in include game developer Team17 (owner of the Worms series), marketing group Next 15, and workplace education software specialist Learning Technologies. The Octopus AIM IHT Portfolio has lost nearly 9pc over five years.

Mr Hyett added: “Unicorn is an established fund manager with significant experience in the Aim market and managing UK small-cap portfolios. The investment strategy is uncomplicated, targeting established and profitable companies, preferably whose founders or management team have retained a significant stake in their business.

“Investors into the service have a choice between the dividend or growth portfolio, as well as responsible investment options for both portfolios.” 

Companies it invests in include premium London pub company Young & Co’s Brewery, identity and fraud data group GB Group and flooring specialist James Halstead.  The Unicorn Dividend Focus AIM IHT Portfolio has returned 5.2pc over three years and the Unicorn Growth Focus AIM IHT Portfolio has returned 7.3pc.