A case of the Japanese blowfish?
“The Japanese blowfish is risky unless you slice it up the right way – but it’s a delicacy”.
That’s the vivid image used to describe AIM in our recent expert roundtable video: highly risky unless you know what you're doing.
But why might it be worthwhile taking that risk?
Investing in AIM could help you protect your ISA from inheritance tax. So, if you are an experienced investor and are worried about losing up to 40% of your ISA to inheritance tax you might want to watch this video.
We discuss the risks and benefits of AIM investing with three experienced stockpickers who run AIM ISA portfolios: Chris Hutchinson from Unicorn, Justin Waine from Puma and Stephen English from Blankstone Sington.
New video – expert roundtable: Investing in AIM for IHT relief
Why consider AIM if you invest in ISAs and are worried about IHT?
It’s simple. ISAs are very tax efficient whilst you live, but not on death: they could be subject to inheritance tax (IHT) at 40% on your death (or your spouse's, if later).
There is a way to prevent this.
If your ISA is invested in certain AIM shares, it could be free from IHT after two years, provided you still hold the shares on death and they're still qualifying.
So, you could get three valuable tax breaks in one: no capital gains or income tax whilst you live, plus no IHT after you die.
That said, it’s not a decision to take lightly. Investing in AIM is high risk – AIM shares can be more volatile and illiquid than those on the main market. Capital is at risk. Tax rules can change and benefits depend on circumstances.
How do AIM Inheritance Tax ISAs work?
An AIM Inheritance Tax ISA is a portfolio of AIM shares designed to be held in an ISA and offer IHT protection.
The portfolio is built and managed by a professional manager:
- You can benefit by investing your ISA allowance (currently £20,000) or transferring existing ISAs (unlimited amounts).
- Whilst you’re invested, any growth and income are tax free.
- If your circumstances change and you want or need some of that money, you can take it out. The amount you withdraw will no longer be IHT free and the value of your ISA will depend on performance. Also, AIM shares are less liquid than ordinary shares so it will usually take longer to sell.
- After your money has been invested in the portfolio for at least two years, it should become IHT free.
Why the IHT relief?
The portfolio invests in AIM companies that qualify for something called Business Property Relief, BPR in short.
BPR was originally created to allow family businesses to be passed on through the generations IHT free but it has been extended since. Today many (but not all) AIM companies enjoy this perk.
As a result, if you hold shares in AIM companies that qualify for BPR for at least two years and still hold them on your death, no IHT should be due on them.
To clarify: BPR has been around for years. What is relatively new is the ability to combine the IHT relief granted by BPR with the ISA tax benefits of tax-free income and growth.
It’s only since August 2013 that new rules have allowed AIM shares to be held in an ISA, thereby making the IHT-free ISA a reality. So any potential growth and income could be tax free during your life with the comfort no inheritance tax should be due on your death.
If you have existing ISAs, are worried about IHT, and are comfortable with the greater risks of investing in AIM, you could consider investing in AIM Inheritance Tax ISAs.
It could be the first step towards preventing the taxman from taking up to 40p of every £1 you’ve worked hard to save.
Blankstone Sington IHT AIM ISA
An interesting option for experienced investors wishing to target the smaller end of the AIM market or to add diversification to an existing IHT portfolio. No initial charge and annual charge from 0.5%. Minimum investment £50,000.
Unicorn AIM IHT ISA
A portfolio run by one of the most experienced AIM stockpickers. It seeks the “blue chips” of AIM: profitable, dividend-paying companies. Minimum investment £50,000.
Puma AIM IHT ISA
A portfolio managed by Puma Investments, part of Shore Capital, one of the largest AIM market makers. It typically seeks family-owned or founder-controlled firms. Minimum investment £15,000.
Offers marked with a golden “W” are our “Featured Offers”: our favourite amongst current offers, although this is not a personal recommendation to invest. Read more on how we choose
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision 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.