A Comparison of AIM and Generalist Business Relief Schemes

Whitman Insights Business Relief

Over recent years the demand for Inheritance Tax (IHT) planning has increased due to a combination of asset price inflation and a freezing of the IHT-nil rate allowance, increasing the number of estates liable to IHT. This has led to the introduction of a range of innovative Business Relief (previously known as BPR, Business Property Relief) schemes, which provide 100% exemption from IHT after a two-year holding period (providing the assets are held on the date of death), whilst also enabling the client to retain control and flexibility to realise the assets if their financial circumstances change.

There are two type of Business Relief (BR) scheme – AIM and Generalist. We consider both schemes ‘high’ risk as they are invested in an illiquid and potentially volatile asset class. It is important to understand the risks as Generalist BR schemes are often viewed as ‘lower’ risk. A summary of the advantages and disadvantages of both schemes is provided in table 1.

AIM BR portfolios have the advantage of being ISA eligible and offer a greater (uncapped) opportunity for capital appreciation, with investment returns linked to the wider UK equity market. Using MICAP [3] data, a typical AIM IHT client has averaged a compound net return of c.9% over the 10-year period to Dec 2022 (this return incorporates the 30%+ drawdown in AIM in 2022). AIM portfolios also offer the potential for diversification by sector together with the ability to invest in companies listed on a regulated market, providing transparency, liquidity and pricing determined on an arms-length basis. However, on the downside, there is short-term volatility as the underlying holdings are marked-to-market on a daily basis. 

Generalist BR schemes have been promoted to overcome the short-term pricing volatility by investing in operating assets (such as social housing, care homes, solar and wind generation) and lending activities (in the form of leasing or property backed bridging loans). Whilst these activities are designed to provide stable and predictable returns, typically targeting 2-4% pa capital growth, there is the danger that clients fail to fully appreciate the risks and inherent difficulty valuing unlisted assets. 

Although the targeted returns of Generalist BR schemes are low, after a management fee of c.1% (which is often deferred and contingent upon hitting the target rate of return) and an investee monitoring fee of up to 3% (which is unconditional), a degree of leverage is required. Whilst, to date, Generalist BR schemes have largely achieved the target return this has been in a zero/low interest rate environment, which has reduced the cost of debt and supported asset values due to a low discount rate. It is also worth noting, a higher interest rate and more unstable economic environment increases the default risk associated with the lending activities. Furthermore, over recent years the UK Government has reduced the level of subsidies associated with renewable energy and wholesale electricity prices have fallen substantially from the 2022 peak [2]. This will undoubtedly reduce the future returns. 

Generalist BR schemes also suffer from a lack of transparency and oversight, with information limited to Companies House and the provider’s fact sheet. There is also a potential conflict of interest in how the assets are valued, as typically the annual management fee is only paid if the target return is achieved. More recently, the difficulty with valuing unquoted assets, even when they are deemed low risk, has become evident with the difficulties at ThomasLloyd Energy Impact Trust (shares down 80%) [1] and since renamed Asia Energy Impact Trust), Home REIT (shares down 72% [1] and suspended) and Gresham House Energy Storage Fund (shares down 45% [1]) providing a timely reminder of the risks. Finally, liquidity with Generalist BR schemes is limited to the investment manager providing a matched bargain, which may become more difficult if outflows outweigh inflows.

Whilst we continue to believe BR portfolios have an important role to play as an IHT tax planning strategy we would like to remind advisers they are only suitable for clients with a high-risk tolerance and high capacity for loss. We recognise that Generalist BR schemes may be more suitable than AIM for clients with a short time horizon. However, where possible, we would encourage advisers to combine both AIM and Generalist BR schemes to increase the level of diversification. Moreover, given the potential for greater investment returns, for clients that are starting IHT planning at an earlier stage or who have an ISA, there is also an argument for favouring AIM especially post the 40% [1] correction in the AIM market post the September 2021 peak.

Table 1: Summary of Advantages and Disadvantages of AIM and Generalist BR

AIM BR

AdvantagesDisadvantages
ISA-eligible
Attractive entry point post 40% correction in AIM
More suitable for clients with longer time horizon
Independent pricing and regulated market
Transparency
Volatility

 

Generalist BR

AdvantagesDisadvantages
Low volatility
More suitable for clients with short life expectancy
Low target investment return
Non-ISA eligible
Lack of transparency
Difficult to value investments
High fees
Limited trading history 
Restricted liquidity

 

[1] London Stock Exchange
[2] Ofgem, May 2024
[3] MICAP AIM performance, 2 Feb 2023

Disclaimer: Although Whitman uses all reasonable skill and care in compiling this report, no warranty is given as to its accuracy or completeness. The opinions expressed accurately reflect the views of Whitman at the date of this document based on our views at such time regarding market conditions and other factors, may depend upon assumptions or projections that may not prove to be correct, and are subject to change. The opinions stated are honestly held, they are not guarantees and should not be relied upon. 

The value of investments may fall as well as rise and your capital is at risk. Information on past performance, where given, is not necessarily a guide to future performance. We strongly recommend that you seek professional advice before you consider making investments is such securities. AIM has less stringent rules and AIM company shares may be less liquid than those companies listed on the London Stock Exchange.

Current tax rules and the available tax reliefs offered on investments into AIM-quoted stocks may change at any time, and there is a considerable risk that if the legislation changed in respect of these tax reliefs, then those stocks that no longer qualified for such reliefs would be subject to heavy selling pressure, potentially leading to significant investment losses.

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