What is an AIM ISA portfolio?
An AIM ISA portfolio or AIM IHT ISA portfolio, as the name suggests, is a portfolio of AIM-listed shares that should benefit from IHT relief, designed to be held in an ISA.
The portfolio is built and managed by a professional manager:
Whilst you’re invested, any growth and income are tax free.
After your money has been invested in these shares for at least two years, it should become IHT free, provided you still hold them on death and they remain qualifying.
Why the IHT relief?
The portfolios invest in AIM companies that qualify for something called Business Property Relief, BPR in short.
If you hold shares in AIM companies that qualify for BPR for at least two years and still hold them on your death, no IHT should be due.
What are the main benefits of investing in an AIM ISA?
- Tax-free income and growth – for as long as you live.
- Pass on more of your wealth free of IHT – shares in AIM BPR-qualifying companies can benefit from 100% IHT relief.
- Speed – IHT relief kicks in after just two years. This compares favourably to other forms of estate planning.
- Simplicity – investing in an IHT portfolio requires a simple transaction, similar to investing in other tax-efficient products. There are no eligibility criteria for income, health or age. Investors are, however, required to answer some questions about their investment knowledge and experience.
- Control – your money is not locked away. Should your circumstances change or should you need access, you can make withdrawals. The amount you withdraw will lose its ISA status and will no longer be IHT free, but what remains invested should be.
- Potential for growth and dividends – the companies in which you invest may grow in value or pay dividends, although this is not guaranteed.
- Professional management – the portfolio is managed by a professional team, which researches and selects the investee companies and monitors them to ensure they remain BPR qualifying.
What are the main risks of investing in an AIM ISA?
- Your capital is at risk – your investment can fall as well as rise in value so you could get back less than you invest. In addition, because AIM-listed companies tend to be smaller, more volatile and subject to less stringent checks than those quoted on the main London Stock Exchange, the risks are greater.
- Less diversification – an AIM ISA may be less diversified than a well constructed Stocks & Shares ISA portfolio.
- IHT relief is not guaranteed – tax benefits depend on circumstances and tax rules can change. To benefit from IHT relief you must hold the investment for at least two years and on your death and the companies must maintain their qualifying status. The government may change the rules on BPR in future
- Investments may be difficult to sell – shares in AIM-listed companies are more illiquid than those quoted on the main London Stock Exchange, so they may be more difficult to sell.
- Not for everyone – AIM ISAs are only for experienced investors, who fully understand and are happy with the benefits and risks. You should only invest if you can withstand loss of capital.
In what kind of companies do AIM portfolios invest?
AIM ISAs invest in AIM companies that qualify for BPR. AIM is a diverse index, comprising some 900 companies worth from around £200,000 to over £3 billion (March 2019). AIM IHT portfolio managers tend to focus on established, larger, mature businesses. They should be more resilient and deliver growth but can be quite volatile.
When you invest in an AIM portfolio you acquire shares in the underlying companies.
Examples from our favourite AIM ISA portfolios
James Halstead plc – Unicorn AIM ISA
James Halstead plc is a major international group that manufactures contract and consumer flooring. Its products are used all over the world, including in high-profile projects such as on the world’s largest cruise ship, Royal Caribbean’s ”Freedom of the Seas”, and in every carriage of the highest train on the planet, the Machu Picchu Railway in Peru.
The business has been in the same family for four generations, since 1915.
Ideagen plc – Blankstone Sington IHT AIM ISA
Ideagen offers governance, risk and compliance software to tackle risk management in an organisation. It’s a dull but importance service. The software is used by over 3,000 organisations in life sciences, aerospace and defence, finance, transport and healthcare. Blankstone Sington believes all are sectors in long-term growth trends. Clients include BAE Systems, Emirates, Shell and the European Central Bank as well as 150 hospitals in the UK and US. Again, senior management has a sizeable stake in the company and a recent placing funded an acquisition of a complementary software company.
How much can I invest?
The maximum that can be subscribed to an AIM ISA is determined by the ISA allowance at the time (currently £20,000).
You can, however, transfer unlimited amounts from existing ISAs.
The minimum investment will vary depending on the provider. In some cases, the minimum investment is higher than the current ISA allowance, so the portfolio can only be accessed by transferring existing ISAs.
What to consider when transferring existing ISAs?
If you have built substantial wealth in ISAs over the years, one of the most effective ways to protect it from IHT could be to consider transferring it to an AIM ISA.
The process is relatively straightforward:
- You complete and sign a form issued by the AIM ISA provider, which gives it authority to request a transfer from your existing provider(s). You can usually choose to transfer the whole value of your ISA or part of it.
- Your investments will typically be liquidated and the realised value transferred as cash. How long this takes will be determined by your existing provider.
- Once the AIM ISA provider receives the funds, it will invest them.
Before transferring you should double check what fees you might incur. There are normally no transfer-in fees, but your existing provider(s) may charge transfer-out fees. Moreover, you will be out of the market whilst the transfer takes place so your funds will not be affected by any rises or falls in the period.
You can transfer any type of ISA, but please remember AIM ISAs are for experienced investors only. They could be more risky and illiquid than other types of ISA.
Could I take an income?
As you would expect from an ISA, you can take money out – even liquidate the whole portfolio.
Most providers will facilitate withdrawals. It could be a one-off or regular withdrawals. Any withdrawals are tax free.
It’s important to note though any withdrawals will reduce the amount you can expect to become IHT free. Moreover, the amount you withdraw will be part of your taxable estate again, unless you spend it. Lastly, after you withdraw money from an AIM ISA, you can only put it back in up to the unused amount of your current ISA allowance. This means you may lose the tax benefits on the amounts withdrawn from your ISA.
Please remember tax benefits depend on circumstances and tax rules can change.
How do I claim the tax relief?
Similar to what happens with unquoted IHT portfolios, the executors of the will or administrators of the estate can claim Business Property Relief when they value the estate.
They may have to submit schedule IHT412 (Unlisted stocks and shares and control holdings) in addition to form IHT400 (Inheritance Tax account) and alongside any other forms the estate’s circumstances will require as part of the probate process.
The AIM ISA manager will typically send details of the investment along with an information pack to help with this.
What happens to my AIM ISA when I die?
There are three main options for the executors of the will or administrators of the estate:
- The portfolio could be liquidated and any proceeds could be passed on to your beneficiaries.
- The portfolio could remain invested for the beneficiaries. In the case of the beneficiary being a spouse or civil partner, it does not reset the two-year clock for BPR and they can continue receiving tax-free growth and income. Read more on the rules »
- The portfolio could be liquidated and the proceeds used to pay any inheritance tax due on other assets, such as your home, directly to HMRC.
If you died within two years of the investment and the portfolio was liquidated, the proceeds could be subject to IHT, unless it is passed on to your spouse or civil partner.
How do I invest?
If you’re an experienced investor comfortable with the risks, visit the offers page for a list of opportunities available. The two-year clock starts ticking once shares have been bought.
What are the charges?
An AIM ISA will have an initial charge (they vary widely from zero to 4.5%) and an annual management fee (typically in the region of 2% plus VAT).
Providers may also apply dealing and performance fees and other charges. Please read the provider documents for full details of the charges.
Who could consider investing in AIM ISAs?
AIM ISAs are for experienced investors whose estates are large enough to be affected by inheritance tax and who want to retain the ISA benefits. They should only be considered as part of a wider investment portfolio. The type of AIM ISA chosen depends on many factors, including attitude to risk and whether income is needed. If in doubt, always seek professional advice. Tax rules change and tax benefits depend on circumstances.
Can I sell my AIM ISA?
One of the main advantages of investing in AIM ISAs over other IHT-planning strategies is the degree of control you can retain. For instance, if your circumstances were to change, it is possible to request the funds. Of course, in this case, you would, however, lose the IHT relief.