The issue of inheritance tax (IHT) has shot up the agenda for lots of people. Another year of surging house prices means that homeowners with even relatively modest disposable assets are dangerously close to the £300,000 thresh-hold at which IHT kicks in at 40 per cent.

Things have not been made any easier by recent moves to tighten the rules on using trusts to reduce IHT, but there is still one way – for now at least – to stop the taxman grabbing a slice of your assets when you die.

If you have owned certain shares listed on the Alternative Investment Market (AIM) for at least two years, your investment may qualify for business property relief. This means that if you die with the shares in your possession, they will be excluded from your estate for IHT purposes.

The rules, however, can trip up the unwary and AIM has not been a bed of roses for investors – in little more than ten years of existence, the main AIM index has grown by less than 20 per cent.

Little wonder that there is a growing army of advisers touting their services as managers of portfolios of AIM shares specifically designed to avoid IHT. Although their records are short, some appear to have chalked up respectable performances. Rensburg Shep-pards claims an impressive 146 per cent return over little more than five years, while a portfolio managed by Close Fund Management has nearly doubled over a similar period.

But the results are impossible to compare because there is no common standard by which the industry’s returns can be judged.

Part of the problem is that, to qualify for relief, the shares must be held directly – not as a fund with common investments – so most portfolios will be different, even with the same manager.

Richard Allen, of Allen-bridge, the independent financial adviser, says: “The managers will tell you that their model portfolio has done this or that, but you have to be very careful. You have no idea about the timeframe, you don’t know to what extent the portfolio has been changed and to what extent charges have been stripped out.”

What seems clear is that the better managers have mostly kept clear of the sort of companies that have given AIM its cowboy image. Returns seem to have been positive over the past two years, while the AIM all-share index has been on a switchback ride.

Norman Yarrow, of NVM Private Equity, who manages the Turcan Connell AIM Portfolio, says: “Our portfolio is much more steady. The index does not do AIM any favours because it is much more volatile.”

But it may have been the rules as much as managers’ skills that kept many IHT portfolios clear of the online betting companies, which crashed to earth after problems in the US, or volatile Russian mining stocks. Investors may lose IHT relief if they invest in companies that operate mainly overseas or do not match the definition of a trading company. As a result, IHT managers tend to avoid the more risky AIM stocks.

And you can pay handsomely for their services. The Close Inheritance Tax Service, for instance, makes an initial charge of 6 per cent, plus VAT, and an annual management charge of 1.75 per cent.

With dealing costs and a spread between buying and selling costs on AIM of as much as 20 per cent, that can make a serious dent in your capital. Even so, Rupert Yeoward, who manages IHT portfolios for Rathbones, the fund manager, defends the fees, pointing out that there is a lot of work involved. “You have to be very close to the company in terms of what’s going on,” he says. “You must make sure that it is not breaking the rules to qualify for business property relief or reduced business property relief.”

Rathbones employs Price-waterhouseCoopers, the accountant, to vet its investments twice a year to make sure they pass the test.

If you are prepared to take the risks of AIM and pay the charges, the benefits can be substantial, particularly for older investors. Buying into an IHT portfolio and keeping control of the assets can be an attractive alternative to giving away money. After making such gifts, the donor must live for another seven years for the money to escape IHT.

“It’s unkind to say this is deathbed planning, but the client has a higher chance of surviving the two years [for an IHT portfolio] than the seven years,” Mr Yeoward says.

The shares may also then qualify for business asset taper relief, potentially reducing any capital gains tax from the sale of the shares to 10 per cent.

The one fly in the ointment is that Gordon Brown announced in the Budget that the Revenue is to be given powers to make AIM a “recognised stock exchange”. If implemented, this could end the market’s special tax breaks. And on past form, the Chancellor could act quickly if he thought that too much tax was being avoided.

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