The AIM Inheritance Pitch Has a Spread Problem, Not a Tax Problem

There is a certain kind of November conversation that starts with a glass of something red and ends with someone saying: “My adviser says AIM shares are inheritance-tax free.” It is a lovely sentence. It is also incomplete.

Inheritance-tax thresholds are frozen again, which means more estates are being dragged into the net by stealth. The nil-rate band has been stuck at £325,000 for years, the residence nil-rate band at £175,000, and fiscal drag is doing the rest. So the pitch is understandable: put a slice of the estate into a basket of AIM shares, hold for two years, and HMRC knocks a chunk off the bill.

Except the pitch has changed. Since April 2026, the relief on AIM shares has been pared back to 50%, not 100%. If your adviser is still quoting the full 100% trick, ask which year’s manual they are reading. The tax break is real, but it is smaller than the brochure suggests. And the smaller it gets, the more the other costs matter.

The tax break is the easy part

AIM shares can qualify for business relief, which reduces the value of the estate for inheritance-tax purposes. But the rules are fussy. You have to hold the shares for at least two years. You have to still own them when you die. If you sell and rebuy, the clock resets. If the company stops qualifying, the relief can vanish.

That two-year rule is not a technicality. It is a lock-up. You are not just buying a small-cap portfolio; you are agreeing to stay put through whatever the market does. If you need the money in year three because the roof has gone or the business has hit a wall, you may be selling at exactly the wrong moment — and you may be selling into a market that knows you are a forced seller.

The exit is the trade

Here is the part the tax pitch tends to skip: you need a buyer. AIM is not the FTSE 100. It is a market of smaller companies, thinner trading volumes and market makers who are not charities. On a quiet Tuesday, the spread on a mid-cap AIM name might be 2–4%. On a bad Friday, it can be 8–12%, or the quote can simply disappear.

That spread is a real cost. If you buy a £100,000 AIM portfolio and the average spread is 5%, you are down £5,000 before the taxman has even been introduced. If the estate has to sell in a hurry to pay an inheritance-tax bill, the exit price may be well below the valuation used at death. Executors do not have the luxury of waiting for the perfect bid.

And remember why the estate is selling. Inheritance tax is usually payable within six months. The taxman wants cash, not a share certificate. If several estates are selling AIM shares at the same time — after a market wobble, say — the pool gets very shallow very quickly. Liquidity is fine until you need it.

Concentration risk in a tax wrapper

AIM portfolios are small-cap portfolios. They have sector concentration, key-person risk, funding risk and the occasional accounting surprise. A 20-stock AIM basket is not diversified like a global fund; it is a venture sleeve with a London listing. You would not put 40% of your estate into early-stage companies because of a tax rebate. Yet that is what a 100% relief pitch quietly encourages.

The tax relief does not make the underlying business safer. It does not make the bid/ask spread narrower. It does not make the company more likely to survive the next downturn. It is a discount on the tax bill, not a guarantee on the capital.

Size it like venture capital

A sensible approach is to treat AIM as a venture-capital allocation — because that is what it is. That means a small slice of investable assets, not the core. Five to ten per cent is a reasonable ceiling for most people. Use money you will not need for at least five years. Diversify across names, but accept that 20 AIM stocks are still one asset class.

Before you buy, check the spread. If it is wide, you are already behind. Ask what happens if you die in year one. Ask what happens if you need to sell in year three. Ask whether the portfolio would still make sense without the inheritance-tax relief. If the answer is no, the relief is not a reason to own it.

The rules can change again

The April 2026 change is a useful reminder: tax relief is a political variable. A future Budget can tinker with it again. Liquidity, on the other hand, is a market variable, and it does not care what the Chancellor says. You can plan around the tax. You cannot plan around a buyer who does not show up.

AIM can be a useful tool for the right estate, held for the right reasons, at the right size. But it is not a loophole. It is a liquidity test with a tax rebate attached. The test is simple: when the estate needs to sell, will there be a buyer? If you cannot answer that with confidence, size the position so a bad exit does not wreck the plan.

That is the Daily Reckoning view. The tax break is the headline. The spread is the story.