Concerned about IHT? Could now be a good time to invest in AIM?

Investing in AIM is a popular choice for many experienced investors concerned about inheritance tax (IHT), especially those with large sums in an ISA. The IHT relief available on certain AIM shares could help you shelter your investments from up to 40% tax when you die. 

This is because, under current rules, certain AIM shares qualify for Business Relief. This means that an investment in those shares could be free of IHT after two years, provided that, on death, you still hold them and they remain qualifying. 

But is now a good time to invest? 

AIM has always been a market of extremes, with a few successful companies but also many failures. The last couple of years have, however, been tough across the board. Rising interest rates have hit the valuation of smaller, high-growth companies, while more mature AIM businesses have had to contend with a challenging economic environment that saw the UK technically slipping into recession at the end of 2023. 

The AIM market has fallen around 13% over 12 months and 35% over three years, so some might be eyeing the market with scepticism. 

But might this be, for the brave at heart, a good time to back the UK’s junior stock market? And could the potential for IHT relief make it worthwhile to take the considerable risks?

Important: AIM shares are more volatile and illiquid than those on the main stock market. To benefit from IHT relief under current rules, you must hold the investment for at least two years and on death and the shares must remain qualifying. This is not personal investment advice: you should decide for yourself if an AIM IHT portfolio is right for you – seek advice if unsure. Tax rules can change and benefits depend on circumstances.

“Be greedy when others are fearful”

One of Warren Buffett’s maxims is “Be greedy when others are fearful”. And there’s plenty of fear around AIM – from macro-economic concerns to worries the UK stock market is stagnating. 

But could there also be reasons to be greedy?

Warren Buffett’s logic is that when other investors are fearful, share prices tend to be lower and you could potentially pick up a bargain.

Current worries are certainly impacting AIM market prices. AIM’s price-to-sales (P/S) ratio – commonly used as an indication of a stock or market valuation – is currently around 1.0, well below the market’s five-year average, a sign that sometimes suggests it may be undervalued. 

The same is true of some of the more established companies on AIM, the kind that tend to be included in AIM IHT portfolios. We have looked at 31 companies held in three or more of the AIM IHT portfolios available through Wealth Club. Their current P/S ratio is, on average, over 20% lower than it's been over the past five years.

Popular AIM IHT portfolio stocks – P/S ratio

Source: Morningstar, 18/03/2024. The chart shows the average P/S ratio of the 31 AIM stocks held within at least three of the AIM IHT ISA portfolios available via Wealth Club.

When the P/S ratio has been around the current level in the past, the AIM market has gone on to deliver returns of around 19% over the following three years and 38% over five years (based on monthly returns data since January 2012), as shown in the chart below. Please remember past performance is not a guide to the future, and investments can go down as well as up in value.

This could be of interest to investors concerned about inheritance tax who are considering investing in AIM. 

Historic investor total return following P/S ratio at current levels

Source: Morningstar, 18/03/2024, past performance is not a guide to the future and you could get back less than you invest. Returns over short periods should be viewed with caution as these are long-term and volatile investments.

The potential value of IHT relief 

One certainty about stock markets is that it’s impossible to accurately predict which way they are going to go – there are undoubted risks. 

That said, once you factor in a potential IHT savings of up to 40%, you may consider the risks more palatable, if you have other assets to fall back on. 

The table below shows the potential value of an illustrative £10k investment on death after two, five and 10 years with and without IHT relief, for a range of investment returns. 

  With IHT relief Without IHT relief
(subject to 40% IHT)
Average loss or gain on shares per year 5% loss 2% loss 5% gain 5% loss 2% loss 5% gain
Value after 2 years* £9,025 £9,604 £11,025 £5,415 £5,762 £6,615
Value after 5 years* £7,738 £9,039 £12,763 £4,643 £5,424 £7,658
Value after 10 years* £5,987 £8,171 £16,289 £3,592 £4,902 £9,773
*Illustrative value on death, after taking any IHT relief into account and assuming no other reliefs or nil rate bands apply.

The table above shows the effect of IHT on the value of investments for various rates of return. It is presented gross of all fees and is for illustration purposes only. All investments will incur fees which will reduce your overall return. AIM investments are volatile, a consistent loss or gain is unlikely. Tax rules can change and benefits depend on circumstances.

Looking at it another way, if IH of 40% was chargeable on the whole £10,000 investment, without IHT relief, you’d need a cumulative return of 67.5% over 10 years just to cover the cost of the tax.

Six professionally managed AIM IHT portfolios to choose from

If after carefully weighing the potential benefits and the considerable risks, you decide an AIM IHT portfolio might be for you, there are six offers available through Wealth Club. 

We have reviewed each of them, covering investment strategy, manager, performance, risks and charges to help you make a better-informed decision for yourself. Please note: our reviews are not personal investment advice.

Important: if planning to make an AIM IHT ISA subscription for this tax year, the deadlines are in the next couple of weeks. 

Risks – important

If considering AIM Inheritance Tax Portfolios, you should be comfortable with the significant risks of investing on AIM – you should not invest money you cannot afford to lose.

AIM IHT portfolios should only form part of a balanced portfolio. 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 (spread) of AIM shares is often wider than the spread for shares listed on the main market. The fewer the companies included in the portfolio, the higher the risk of loss.

Eligibility for IHT relief, based on current rules, is assessed at the date of death. Tax rules can change and benefits depend on circumstances.

Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

There have been, and continue to be, widely reported rumours that the government might change IHT rules and reliefs in future (after any election).

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 

AIM IHT portfolios

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