Today: the birthday of IHT-free ISAs
Five 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, a client who 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 portfolio value 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 the shares of 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, illustrates both the short-term volatility and the longer-term rewards, although past performance is not a guide to the future.
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.
Which portfolio could I consider?
Octopus AIM ISA
This is one of the oldest portfolios of this kind and the largest, with £1.5 billion in assets (Jun 2018). The portfolio launched in June 2005 and has an exceptional track record: the median performance to 30 June 2018 is 279.64%, compared with 25.51% for the AIM All-Share. Please note past performance is not a guide to the future, see annual performance figures above.
It tends to focus on some of the largest, most established companies on AIM. Indeed, the average portfolio company size is £720 million (Jun 2018).
Examples of AIM stocks in the portfolio include:
Young & Co’s Brewery – one of the oldest established businesses in the portfolio, with a market capitalisation of £753.5 million (Jun 2018). It has 181 managed pubs and 74 tenanted pubs throughout London and the South East of England.
Abcam plc – one of Britain’s biggest biotech success stories and the fifth largest company on AIM, with a market capitalisation of £2.7 billion (Jun 2018). Abcam is a producer, distributor and seller of high-quality protein research tools. It started in Cambridge and now has 11 additional locations across Asia, the UK, and the USA.
You can invest £20,000 (the current ISA allowance) or transfer unlimited amounts.
Blankstone Sington AIM ISA
Launched in 2010, this is a much smaller and arguably nimbler portfolio, which invests in different types of stocks; it could be seen as higher risk as a result.
The manager focuses on smaller companies and places greater emphasis on value investing, targeting firms worth £150 million or less. These companies tend to receive little analyst coverage and are likely to be ignored by large fund groups, usually until they get bigger.
It is keenly priced. Unusually for an AIM IHT portfolio, there is no initial charge and the annual management charge is comparatively low at 1.25% or less – see full details on charges.
The portfolio track record is excellent (it has returned 211% since inception in 2010) but past performance is not a guide to the future. Annual performance is shown above.
The minimum investment is £50,000, so to subscribe for this year’s allowance you will need to transfer an existing ISA as well.
The Chancellor has requested a review of a range of aspects of IHT to simplify the tax system. The review’s timescale, scope and impact are unknown. Currently, investments qualifying for Business Property Relief should be free from IHT after two years. Tax rules can and do change and benefits depend on circumstances.
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.