10th anniversary of AIM ISA – now more attractive than ever to IHT-relief seeking investors?

On this day, 5 August, in 2013 investors were allowed to hold AIM shares in an ISA for the first time. 

This seemingly small change in ISA rules has far-reaching consequences for investors with sizeable ISA pots, as it effectively makes it possible to pass ISAs on free of inheritance tax. 

Conventional ISAs – so tax-efficient during one’s lifetime – can incur up to 40% inheritance tax if bequeathed to anyone other than a spouse or civil partner. 

In contrast, certain AIM shares can qualify for Business Property Relief (BPR). This means AIM ISAs (portfolios of AIM shares that should qualify, held in an ISA) could be bequeathed free of IHT, provided you hold the investment for at least two years and on death. Remember, tax rules can change and benefits depend on circumstances. 

Could now be good time to invest in an AIM ISA?

There are two reasons why experienced investors could consider AIM ISAs, particularly now. 

Firstly, more and more families are being dragged into paying IHT – the result of high inflation and property values, combined with long-frozen allowance thresholds. It is estimated more than 280,000 households across the UK face the prospect of higher IHT bills by the end of 2027-28.  Indeed, IHT is forecast to bring in a record-high £7.2 billion in the 2023/24 tax year – £8.4 billion by 2027/28.

Secondly, over the past 10 years, AIM has come of age, potentially becoming more attractive to IHT-relief-seeking investors.

Once regarded as a poor-quality market, filled with small, early-stage and highly speculative companies, AIM is now home to an increasing number of larger, more mature, often dividend-paying, BPR-qualifying businesses.

In 2013, six companies had a market capitalisation of more than £1 billion, four of them were oil & gas companies. The average market capitalisation of the top 50 stocks on the market was nearly £590 million.

A decade later, nine companies were valued at over £1 billion, none of which were in the oil & gas sector, while the average market capitalisation of the top 50 stocks topped £775 million. Despite the market’s growing maturity, though, AIM shares are still considerably riskier and less easy to sell than those listed on the main market.

It’s been a difficult 18 months for AIM, and smaller companies more widely. But the result is that AIM valuations are close to 10-year lows, while the index’s dividend yield is the highest it’s been since AIM ISAs were introduced (AIM currently trades at a dividend yield of 2.4%, the highest in the last 10 years). This could make AIM attractive to experienced investors comfortable with the higher risks – you need to form your own view.

How might you invest in an IHT-free ISA?

If you have the time and inclination, you could research and select AIM-quoted shares that qualify for BPR and build a portfolio yourself. 

Alternatively, there are reputable and experienced asset managers that offer ready-made portfolios. Our current featured offers are Octopus, RC Brown and Unicorn. They each bring highly regarded specialist expertise – and very different, albeit complementary, investment strategies and could be a consideration for experienced investors who have other investments to fall back on, as AIM shares are high risk.

Featured AIM IHT ISAs

Our ‘Featured Offers’ are the current offers we consider to have the most investment merit – this is not personal advice and you should form your own view.