Will Pensions Be the Saviour of AIM?
The AIM All-Share Index experienced another challenging year in 2024, falling by 5.7% (you can listen to our webinar about it here). However, recent proposals in the Autumn Budget could potentially turn the tide for the London Stock Exchange’s junior market.
The Treasury’s proposal to extend Inheritance Tax (IHT) to pension savings has sparked debate, particularly around the concept of ‘double taxation’ which in turn has seen significant interest in investing in AIM for its potential IHT relief.
The Autumn Budget Proposals
The major announcement for pension savers in last Autumn’s Budget was the Treasury’s proposal to extend IHT to pension savings from April 2027. This means that most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes. The media has intensely focused on these proposals, especially the aspect of ‘double taxation’.
Understanding Double Taxation
These IHT proposals do not change the current income tax rules for pensions. If you die before the age of 75, any income taken from your pension benefits by your beneficiaries would be free of income tax. Any lump sum they take will also usually be income tax-free, as long as it doesn’t
exceed your lump sum and death benefit allowance (LSDBA), which is set at £1,073,100. However, if you die over the age of 75, income tax would be due on any pension income or lump sum taken by your beneficiaries.
The combination of applying IHT and then income tax means your beneficiaries could face a 52% tax bill if the benefits are subject to the basic tax rate, 64% if subject to the higher tax rate, and 67% if subject to the additional tax rate.
The Role of Nil Rate Bands
The calculation gets more complicated when you factor in nil rate bands. No IHT is applied to assets under an estate’s nil rate band of £325,000. Estates may also benefit from the residence nil rate band (RNRB), which is £175,000 and applies to a property left to a direct descendant. If
both these allowances are passed between a married couple, their estates could
leave a combined total of £1 million tax-free.
However, if the estate exceeds £2 million, entitlement to the RNRB is reduced by £1 for every £2 over that threshold and disappears completely for estates over £2,350,000. This means that for some, the addition of a pension fund could push their estates over this threshold, significantly
increasing their tax liabilities.
A Basic Illustration
To simplify things, consider the following: if a pension has £100,000 above the nil rate band, and we apply IHT, it is reduced to £60,000. If the person dies over the age of 75 and income tax is applied at 45%, it is reduced further to £33,000; a 67% effective tax rate.
The Potential for AIM Investments
Given this tax rate, pension savers might look to the AIM market to try to mitigate their IHT liabilities. Business Relief qualifying AIM companies offer a significant tax advantage: if you invest in them for at least two years and still hold the qualifying stocks at death, you only pay 50% IHT (0% pre-April 2026). This could see pension savers using the AIM market to save
up to 50% on their estate’s IHT bill.
Not Set in Stone…Yet
It’s important to note that despite these changes being announced in the autumn budget 2024, these are still proposals, and the final position is yet to be determined. The government will publish more details, and it may be wise to wait for HMRC to provide further guidance before making any significant changes to your financial strategy.
What Could it Mean for AIM If Proposals Do Become Tax Law?
While the AIM market has faced recent challenges, the proposed changes to IHT could provide a unique opportunity for pension savers to reduce their tax liabilities and potentially revive interest in AIM investments. As always, it’s crucial to stay informed and consult with financial advisors to navigate these complex changes effectively.
Next Steps if You are Considering Moving Your Pension into AIM?
Fundamental Asset Management have been investing in AIM for IHT since 2004. If you or your adviser would like to speak to them about moving your pension into either their AIM
IHT Growth Portfolio or AIM IHT Income Portfolio, contact them via email at [email protected] or call them on 01923 713 890.
