Octopus AIM IHT ISA
Update: how to apply
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The Octopus AIM Inheritance Tax Service is the UK’s largest AIM IHT service, at £1.7 billion (Dec 2019). The service has been managed by the Octopus UK Smaller Companies investment team since 2005. The team has built a strong performance track record and a large following of investors: note past performance is not a guide to the future.
The AIM IHT service has a growth-oriented investment approach. It seeks to invest in companies with dominant market positions in growth markets, often much larger companies than one might expect when considering an AIM investment. The average market cap of an investee company in the service is over £700 million, and one fifth of the buy list portfolio is valued at more than £1 billion.
We believe this is an attractive offer for wealthy or sophisticated investors considering an AIM IHT portfolio. The service is available both in and outside an ISA.
ISA: apply online or top up
An AIM ISA lets you hang on to the ISA perks of tax-free growth and income yet also potentially pass on your ISA IHT free. This is 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. Tax rules can change and benefits depend on circumstances.
- Largest ready-made AIM IHT portfolio
- Impressive long-term performance record – not a guide to the future
- Seeks to invest in established and profitable businesses
- Experienced investment team managing £1.7 billion in the service
- Minimum investment £20,000 for ISA (£25,000 outside ISA)
- Save on the initial charge via Wealth Club, compared with going direct
- Available both in an ISA and outside an ISA
- Apply online (ISA only)
Coronavirus – an update from Octopus AIM Inheritance Tax Service
Richard Power, Head of Smaller Companies at Octopus Investments, provides a fund manager’s update on how the current situation has impacted the Octopus AIM IHT Service (1 Apr 2020). Read the update »
The AIM IHT Service is managed by the Octopus UK Smaller Companies investment team, which manages more than £1.9 billion in AIM investments across all Octopus products (Dec 2019).
As the name suggests, smaller company investing takes up 100% of the team’s time.
Headed up by Richard Power, Andrew Buchanan and Kate Tidbury, the team of nine has more than 100 years of industry experience. Together they conduct more than 500 company meetings per year to help identify what they believe are the best investment opportunities. This level of activity is likely to be hard to replicate by competitor AIM IHT providers. The dedicated investment resource is a key differentiator for the Octopus AIM IHT service, in our view.
Overall, the wider Octopus Group manages over £8.3 billion on behalf of over 150,000 clients.
There are around 850 companies on AIM – but only 20-30 make it into the service.
The companies held are not fledgling businesses. Octopus looks for established firms with growth potential, with one or more of the following characteristics:
- Strong market position or global leader in its field
- Scalable growth-focused business model
- Proven management team with a successful track record
- Strong balance sheet, preferably showing profitability
- High level of recurring revenues and earnings visibility
- Ability to pay dividends
Current portfolio overview
One of the key tenets of the investment strategy is to back businesses with strong market positions. Therefore, companies in the portfolio tend to be larger than one might expect. In fact, the average market value of the portfolio companies is £722 million (March 2020). Over a fifth of the buy list has a market cap greater than £1 billion. Just 4% of the portfolio is valued at less than £250 million.
There are currently 28 companies on the Octopus investment team’s “buy list”. The buy list contains stocks the team deems suitable for investment. Whether these stocks are included within a specific client’s portfolio – and in what size – will be determined at the discretion of the investment team based on liquidity and market conditions. As this is a discretionary service, each client portfolio is slightly different.
Average turnover of these companies is £413 million per annum and the average pre-tax profit is £43.7 million, whilst the average dividend yield is 1.9%: variable and not guaranteed. Market cap and sector breakdowns are detailed below.
The buy list has a bias towards software and computer services businesses across diverse sectors.
Source: Octopus Investments.
Source: Octopus Investments
Examples of portfolio companies
RWS Holdings Plc
RWS Holdings is a leading provider of intellectual property support services and high-level technical translation services. The group translates over 50,000 patents a year for clients in the legal, financial, medical, pharmaceutical, chemical, engineering and telecom sectors.
Octopus Investments has been a patient long-term shareholder having first invested in the business in 2005 when RWS had a market cap of less than £110 million. 2019 marked the company’s 16th year of unbroken growth in revenues, profits and dividends since flotation in November 2003. Over the last five financial years to September 2019, the business has grown revenues from £95.2 million to £355.7 million.
Renew Holdings Plc
Renew Holdings plc provides specialist engineering services to maintain and develop energy, environmental and infrastructure assets. The holding company operates a number of subsidiary businesses that provide engineering services to the UK infrastructure market. Key sectors include highways, rail, nuclear, water, and telecoms.
In its latest financial year, the business generated £600 million in revenue and £27 million in profit. Octopus has been an investor in the business since 2007.
Staffline Group Plc
As is to be expected, not all investments work out. A recent example is Staffline Group plc.
Outsourcing specialist Staffline Group plc saw its shares suspended following a 46.0% decline in its share price. This was due to a delay in releasing its full-year results following allegations of improper invoicing and payroll practices. Trading resumed in March 2019 following the company's refinancing, however, it has recently announced a pre-tax loss for the first half of 2019 and has suspended dividend payments until at least 2021.
Octopus has a solid long-term track record. Since launching the service, from June 2005 to January 2020 the service has delivered returns of 259%, equivalent to a return of 9.2% per annum: past performance is not a guide to the future.
The chart below shows performance over five years compared with other AIM IHT portfolios available through Wealth Club. Octopus AIM IHT currently sits in the centre of the pack. This is in part due to the final three months of 2018, where the fall in the AIM market centred on large and more growth-focused companies. This disproportionately affected Octopus’s style of investing. The service since recovered – however, note this chart is prepared quarterly, to June 2020.
The default view is the performance for this particular offer. You'll be able to see the performance of other AIM ISA offers if you click on the portfolio names above. Source: Octopus Investments and other AIM ISA managers. Compounded median monthly returns of all available Octopus AIM Inheritance Tax Service portfolios. Performance is shown net of fees, excluding initial charges, with dividends reinvested, based on the average portfolio performance across the service, except for Puma and Fundamental which shows the performance of one example portfolio. Past performance is not a guide to the future. Dividends are variable and not guaranteed.
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 while depending on market conditions and liquidity. 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.
Risks – important
This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice.
AIM IHT portfolios are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks.
AIM stocks can be hard to sell, particularly at the smaller end of the market, and can be illiquid. AIM shares can be very volatile especially if the market falls sharply. The difference between the buying and selling price of AIM-listed shares is often wider than the spread for shares listed on the main market.
This is the largest AIM IHT portfolio. The manager may find itself less able to act as quickly as smaller AIM ISA providers, which could impact the fund if market sentiment changes or if AIM rules change.
Tax rules can change and benefits depend on circumstances. Eligibility for BPR is assessed at the date of death and will depend on the companies in the portfolio remaining qualifying. Broadly speaking, you will need to have held a BPR qualifying stock for at least two years and still hold it on death to qualify.
A previous Chancellor requested a review of IHT to simplify the tax system. A report was published in July 2019, but this has not yet led to any rule changes. Please remember, tax rules can and do change and benefits depend on circumstances.
A summary of the main charges and savings for an investment within an ISA is shown below. If you wish to invest outside an ISA, please see the provider's documents. The investment may have additional charges and expenses: please see the provider documents for more details. If you would like a full breakdown or a personal illustration, please let us know.
|Full initial charge||1%|
|Wealth Club initial saving||0.25%|
|Net initial charge through Wealth Club||0.75%|
|Annual management charge||2%|
See example of the total charges over 5 years
This is a longstanding Inheritance Tax service with a strong performance track record, though there is no guarantee of future performance. The service is well resourced. You’re investing in the largest AIM IHT offering by some distance. In our view, the team’s size and level of funds under management could provide excellent access to underlying companies and allows the team to produce the breadth of high-quality research needed to build an AIM portfolio. However, it may also mean the portfolio is less nimble than its peers.
If you’re an experienced investor looking for an AIM ISA, we believe the Octopus AIM service is worthy of consideration. It also has a minimum of £20,000 which could make it a contender for this year’s ISA subscription.
ISA: apply online or top up
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
- Portfolio size
- £1.7 billion
- Average market cap
- £722.0 million
- Initial charge
- Saving via Wealth Club
- Net initial charge