Octopus AIM IHT ISA
This long-standing AIM IHT ISA is one of our favourites. An AIM ISA lets you hang on to the ISA perks of tax-free growth and income yet also potentially pass on the ISA IHT free. This is all thanks to Business Property Relief (BPR) which is available for certain AIM shares. If you hold the shares for at least two years and on death, under current rules they should be free of IHT.
Thanks to increased allowances, couples can this year start to shelter £40,000 from IHT in an AIM ISA.
- Impressive long term performance record (not a guide to the future)
- Established and profitable businesses sought
- Available in or outside an ISA
- Using ISAs, couples can start to shelter £40,000 from IHT this year between them
- Save on the initial charge via Wealth Club, compared with going direct
The Octopus AIM Inheritance Tax Service is run by the Octopus UK Smaller Companies team which has a combined experience of more than 100 years. The team, which includes Richard Power, Kate Tidbury, Andrew Buchanan, Chris McVey, Edward Griffiths, Stephen Henderson, Mark Symington and Dominic Weller, manages over £1.2 billion in AIM-quoted companies. In total Octopus manages over £6 billion and has more than 500 employees.
There are around 1,000 companies on AIM – but only 25-30 make it into the Octopus portfolio. These are not fledgling businesses: the team look for established firms with growth potential. In fact, the average market value of the portfolio companies is £509 million. The team seeks defensive companies it believes have a competitive edge, a strong balance sheet and preferably recurring revenues.
As you can see from the chart below, to date the investment process has worked. The median performance of the portfolio since launch in June 2005 is 200.71%, compared with 126.29% for the FTSE All-Share and 0.61% for the AIM All-Share. Please note past performance is not a guide to the future.
Source: Lipper, Octopus Investments; 31 January 2017
Discrete 12-month performance to 31 December (%)
|Octopus AIM Inheritance Tax Portfolio||11.16%||51.87%||13.03%||25.85%||6.48%|
|FTSE AIM All-Share (Total Return)||2.86%||21.33%||-16.53%||6.63%||16.07%|
|FTSE All-Share (Total Return)||12.30%||20.81%||1.18%||0.98%||16.75%|
Source: Octopus Investments. Total returns of the Octopus AIM Inheritance Tax Service portfolio are median returns from 30 June 2005 with an appropriate sample of investor portfolios. If cash is added or withdrawn during the relevant period, these portfolios have been removed from the calculation. Total returns include the impact of dividend income, interest, management fees and dealing fees. Performance is shown alongside the total returns of the FTSE AIM All-Share and FTSE All-Share (Total Return) indices. Neither index is used as a benchmark for the AIM Inheritance Tax portfolio due to the limited universe of stocks eligible and available to the fund. Past performance is not a guide to the future.
What kind of companies are in the portfolio?
AIM is home to a wide range of companies – young and old, profitable and unprofitable, well run and not. The skill of an AIM fund manager is in sorting the wheat from the chaff. Examples of AIM stocks in the Octopus IHT portfolio include:
Young & Co's Brewery – one of the oldest established businesses in the portfolio. It has 169 managed pubs and 79 tenanted pubs throughout London and the South East of England. Market capitalisation £593 million; forecast profit before tax £39.2 million for the year to March 2017.
RWS plc – leading provider of intellectual property support services and technical translation services. The group translates over 50,000 patents a year for clients in legal, financial, medical, pharmaceutical, chemical, engineering and telecom sectors. Market capitalisation £620 million; forecast profit before tax £30.5 million for the year to 30 September 2016.
Restore plc – specialist in document management and office relocation. It has grown significantly recently and benefits from high levels of recurring revenues from clients in the public and private sectors. Market capitalisation £372 million; forecast profit before tax £21.3 million for the year to December 2016.
Exit strategy and access to your investment
Investments in this portfolio are for the long term. However, if your circumstances change, you can sell some or all of your shares, although sometimes this can take a little while. You can arrange to take regular withdrawals from the account, which you can change or stop at any time. Any amount you withdraw will of course no longer be IHT free and will lose its ISA tax benefits.
On your death, your heirs can decide to keep the portfolio invested, liquidate it or use it to pay any IHT due. The claiming process is straightforward, via a simple form to complete and send to HMRC. Octopus prides itself both on its customer service and its experience in paying out on death.
Capital is at risk and you should not invest money you cannot afford to lose.
Eligibility for BPR is assessed at the date of death and will depend on the companies remaining qualifying. Remember, tax rules can change and the value of tax benefits depends on circumstances.
Liquidity of companies listed on AIM is a key risk. AIM can be a volatile market with little trading at certain points. Octopus is one of the largest managers in this market, which brings benefits in terms of company access but could also restrict trading ability.
The annual management fee is 2% plus VAT. In addition, there is a share dealing charge of 1% on all purchases and sales. There is no performance fee. For the AIM ISA, the initial charge is 1%, before Wealth Club saving.
If youʼve been prudent enough to shelter significant amounts from tax in an ISA and your estate is likely to be liable for IHT, why lose the benefits at the end? Unless you do something about it, the government might take 40p of every £1 you’ve worked hard to save in ISAs over the years.
If you’re looking for an AIM ISA, and want to start the two-year clock to potentially shelter it from IHT, we believe the Octopus AIM ISA is worthy of consideration. This long-standing Inheritance Tax service has comfortably outperformed the AIM index since inception, though there is no guarantee of future performance. The team’s size and level of funds under management ensure excellent access to underlying companies.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment. 05.04.2017
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