Today: the birthday of IHT-free ISAs
Four years ago today a seemingly minor ISA rule change created a solution to one of the most vexing problems wealthy ISA investors face.
That problem is: how do you prevent your ISA being clobbered by tax when you die?
ISAs – so tax efficient in many other ways – could be subject to Inheritance Tax (IHT) when you or your spouse dies. Until recently, the options were limited and unattractive to many. They could either keep the ISA and let it potentially fall prey to IHT at 40%, or they could give up the ISA tax benefits, take the cash and give it away or put it in trust.
On 5 August 2013 a new and arguably more appealing option became possible. A change to ISA rules meant you can now hold AIM shares in your ISA. Many AIM shares qualify for something called Business Property Relief (BPR in short). If you hold BPR-qualifying shares for two years and still hold them on death, the investment could become IHT free. Remember, tax rules can change and benefits depend on circumstances.
An increasing number of investors are taking advantage of this rule change by investing – or transferring existing ISAs – into an AIM ISA: a portfolio of AIM shares specifically created and expertly managed that aims to deliver some growth and IHT relief.
As Mr Clark, who recently invested in the Unicorn and Octopus AIM ISA portfolios through Wealth Club said in an interview with the Financial Times: “I don’t want to give away all that money to the government. I’d rather give it to my children.”
What does an AIM ISA look like?
An AIM ISA works similarly to a conventional Stocks & Shares ISA:
- You have the same allowance – £20,000 this year (but you can transfer in unlimited amounts)
- Once invested, your money can grow free of capital gains tax and any income is tax free
- You decide whether to take an income or let any growth accumulate
- You are in control of your money: you can make withdrawals or take the whole pot in cash if you need
- Your money moves up and down in line with the stocks and shares it holds
There are two main differences.
First, unlike a conventional Stocks & Shares ISA your AIM ISA should be IHT free after two years.
Second, your money is invested in AIM shares, which are considered more risky and are less easy to sell than those listed on the main stock market.
That said, the most popular AIM ISA portfolios tend to invest in shares in established, profitable, often family-owned businesses with good earnings growth potential and a history of paying dividends.
The performance of the main portfolios, as shown below, suggests this approach has so far worked, although there is no guarantee this will continue to be the case.
Remember, capital is at risk and investors should not invest money they cannot afford to lose.
Under current rules, BPR-qualifying AIM investments held for at least two years and on death are IHT free but please remember tax rules can change. HMRC will only assess if assets qualify for BPR on death.
Source: providers listed, see below for more details. 12 month data not available for Unicorn. Past performance is not a guide to the future.
Annual performance (to December each year)
|Blankstone Sington IHT Portfolio (AIM)||21.07%||33.82%||4.34%||17.90%||14.57%|
|Octopus AIM Inheritance Tax Portfolio||11.16%||51.87%||13.03%||25.85%||6.48%|
|Puma AIM IHT Service||—||—||4.72%*||30.90%||4.98%|
|Stellar AIM IHT Service||18.2%||38.1%||-1.9%||30.2%||9.5%|
|Unicorn AIM IHT Service (Income)||—||—||—||—||6.9%**|
|Unicorn AIM IHT Service (Growth)||—||—||—||—||14.3%***|
Source: Blankstone Sington, Octopus Investments, Puma Investments, Stellar Asset Management and Unicorn Asset Management. Past performance is not a guide to the future. Providers are listed in alphabetical order, figures shown are net of ongoing management charges. Figures are provided by the investment groups listed above and typically represent performance for a weighted sample of portfolios: in the case of Puma this is the investment director’s own portfolio. Variations in performance will apply as each investor has their own discretionary managed portfolio of assets. All figures to 31 December except Stellar figures which run to 5 January. Figures are shown for the past five years or since launch. *Puma launched in July 2014. **Unicorn income portfolio launched in May 2016. ***Unicorn growth portfolio launched in January 2016.
What kind of companies do AIM ISAs invest in?
Most Aim ISA portfolios comprise between 20 and 30 stocks. Below are example holdings from two of our favourite portfolios run by two of the most experienced AIM managers: Octopus Investments and Unicorn Asset Management.
Octopus AIM IHT ISA
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 £587 million; forecast profit before tax £39.4 million (est for 2018).
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 £886 million; forecast profit before tax £41.4 million (estimated for 2017).
Unicorn AIM IHT 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. Last year it reported revenues of £226.14 million and record profit before tax of £45.5 million, with a dividend yield of 2.78% (as at 30.06.2016). The market cap is over £1 billion.
James Cropper is a specialist materials group and maker of fine paper with operational reach across more than 50 countries. It was established in 1845 and has been in the same family for six generations. Besides targeting organic growth, the company also invests in sustainable innovation. It created the world’s first coffee cup recycling plant, able to process 10 million cups per week. Last year it reported record revenues of £87.92 million and record profit before tax of £3.87 million (as at 02.04.2016). The market cap is £133 million.
For something a bit different, wealthy or sophisticated investors wishing to target the smaller end of the AIM market or to diversify their AIM ISA portfolio, might consider the Blankstone Sington IHT AIM ISA. It invests in smaller companies, and places greater emphasis on value investing.
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based 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.