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.
Octopus AIM IHT ISA
This is the largest AIM IHT portfolio, run by one of the most experienced AIM managers. The investment team manages £2.1 billion across UK quoted company funds, including the Octopus AIM VCTs.
The Octopus AIM IHT portfolio launched in 2005. It seeks to invest in businesses with growth potential, a strong market position and a proven management team. Therefore, companies in the portfolio tend to be larger than one might expect, with an average market value of £682.7 million (March 2023).
RC Brown AIM IHT ISA
RC Brown is a boutique investment management business with £357 million of assets under management, of which £36.2 million is held within the AIM IHT service (March 2023).
The team applies the same investment strategy to this portfolio it has followed since the company was founded, in 1990: it looks to invest in new share issues of companies seeking capital for expansion. This leads the service to have a slight bias towards smaller companies. That said, more than c.60% of the portfolio is invested in businesses valued at greater than £250 million, with the average market cap for companies in the portfolio at £547.5 million (March 2023).
Unicorn AIM IHT ISA
The service is managed by specialist UK smaller company investor Unicorn, under the lead of Chris Hutchinson, who is also lead manager of the Unicorn AIM VCT (the UK's largest AIM VCT) as well as the Unicorn Outstanding British Companies Fund.
The team seeks established, profitable, and cash-generative businesses with minimal gearing, favouring companies whose founders or management team have retained a meaningful stake in the business. Investors have the choice of Dividend Focus (average market cap £361.3 million) or Growth Focus (average market cap £445 million).
Free report: how to make your ISA IHT free
Do you have any Stocks & Shares ISAs? Is your estate worth over £500,000? If you answer ‘yes’ to both questions, your ISA could be eventually caught by 40% IHT.
How could you avoid that? Request this short free report and discover how you could:
- Prevent your money from disappearing in IHT when you’re gone
- Keep control of your ISA for as long as you live – no gifts, no trusts
- Potentially pass on the whole of your ISA IHT-free
- Keep benefitting from any tax-free growth and income
- Make tax-free withdrawals if you need
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.