Today: the anniversary of IHT-free ISAs
Nine years ago today, one small rule change – allowing investors to hold AIM shares (those in companies quoted on the Alternative Investment Market, a sub-market of the London Stock Exchange) in an ISA – had far-reaching consequences for the UK economy and, potentially, for millions of ISA investors.
It helped boost the UK economy, by encouraging much-needed investment into dynamic and job-creating AIM companies, previously largely under investors’ radar.
And it addressed a pressing problem many wealthy ISA investors face: how do you prevent up to 40% of your carefully built-up ISA being lost to inheritance tax when you die?
Up to 40% inheritance tax on traditional Stocks & Shares ISAs
Although not subject to income and capital gains tax, ISAs can incur up to 40% inheritance tax (IHT) when passed on, other than to a spouse or civil partner.
Around £690 billion is currently held in ISAs, mostly by older investors. For those worried about inheritance tax, investing in AIM stocks within an ISA offers the possibility of IHT relief within two years – compared to the seven-year wait common with other forms of inheritance tax planning.
Over the years, an increasing number of experienced investors have taken advantage of this rule change by investing (or transferring existing ISAs) into an AIM ISA: a professionally managed portfolio of AIM shares that aims to deliver some growth and IHT relief. Remember, tax rules change and benefits depend on circumstances.
How AIM shares offer IHT relief
AIM shares can deliver IHT relief thanks to something called Business Property Relief (BPR).
BPR was introduced to allow family businesses to be passed down through generations IHT-free. Its scope now includes shares in certain AIM-quoted companies.
AIM is home to over 800 companies, with a combined market cap of £105 billion, so it can provide AIM ISA portfolio managers with a breadth of investment opportunities.
AIM shares that qualify for BPR should be IHT free if held for at least two years and on death, under current rules. HMRC will only assess if assets qualify for BPR on death.
Comparing AIM ISAs and Stocks & Shares ISAs
The rules for AIM ISAs are broadly the same as for conventional Stocks & Shares ISAs:
- You have the same allowance: £20,000 this tax year, but you can transfer in unlimited amounts
- Once invested, your money can grow free of capital gains tax and income tax
- 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:
Firstly, unlike conventional Stocks & Shares ISAs, your AIM ISA should be IHT-free after two years.
Secondly, and importantly, your money is invested in AIM shares, which are considerably riskier and are less easy to sell than those listed on the main stock market. Remember, capital is at risk and you should not invest money you cannot afford to lose.
How might you invest in an IHT-free ISA?
If you have the time and inclination, you could research and select AIM-listed 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 Stellar. They each bring highly-regarded specialist expertise – and very different, albeit complementary, investment strategies.
Both strategies are only considerations for experienced investors who have other investments to fall back on, as AIM shares are high risk.
Octopus AIM IHT ISA – 25% saving on initial charge
This is the largest AIM IHT portfolio, run by one of the most experienced AIM managers. The investment team manages £2.2 billion across funds, including the Octopus AIM VCTs. The Octopus AIM portfolio launched in 2005, so it has a track record of navigating a recession. It seeks to invest in businesses with a strong market position and a model that can achieve future growth, often much larger companies than one might expect when considering an AIM investment. The average market cap for companies in the portfolio is over £734 million.
RC Brown AIM IHT ISA – no initial charge and reduced minimum of £20,000, apply by 26 August
RC Brown AIM IHT ISA - no initial charge and reduced minimum of £20,000, apply by 26 August
RC Brown is a boutique investment management business with £330 million of assets under management, of which £32.1 million is held within the AIM IHT service. The team applies the same investment strategy to this portfolio it has followed for the past 30 years: 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 £447.5 million.
Stellar AIM IHT ISA – no initial charge plus up to £500 towards transfer fees, apply by 26 August
The Stellar AIM IHT portfolio is led by Stephen English, who previously managed the Blankstone Sington AIM IHT portfolios. The team looks to invest two-thirds of the portfolio into companies it considers to be offering “growth at a reasonable price”, and a third into “Value” or “Special Situation” opportunities, such as companies undergoing a turnaround. 59.3% of the portfolio is invested in businesses valued at less than £250 million; the average market cap of investments within the service is £342.3 million.
AIM IHT portfolios – performance comparison to 30 June 2022
The default view is the performance for our three featured offers. You'll be able to see the performance of other AIM ISA offers if you click on the portfolio names above. Source: Octopus Investments, RC Brown, Stellar and other AIM ISA managers. Performance is shown net of fees, excluding initial charges, with dividends reinvested, based on the average portfolio performance across the service, except for Puma and Fundamental which shows the performance of one example portfolio. Past performance is not a guide to the future. Dividends are variable and not guaranteed.
Five-year discrete performance
|AIM IHT portfolio||YTD||2021||2020||2019||2018||2017||Five years to 30 Jun 2022|
|Octopus AIM IHT||-28.2%||18.4%||0.5%||21.8%||-20.6%||27.8%||-9.9%|
|RC Brown AIM IHT||-30.7%||9.5%||17.5%||23.2%||n/a||n/a||n/a|
|Stellar AIM Inheritance Tax Service||-15.1%||23.6%||-1.0%||29.7%||-17.1%||11.8%||13.1%|
See five-year discrete performance comparison of all available AIM IHT portfolios
Source: AIM ISA managers. Performance is shown net of fees, excluding initial charges, with dividends reinvested, based on the average portfolio performance across the service, except for Puma and Fundamental which shows the performance of one example portfolio. Past performance is not a guide to the future. Dividends are variable and not guaranteed.
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.
How could you make your ISA IHT free?
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