None of the information provided is investment or tax advice. You should always read the associated risks before deciding whether to invest. These can be found on the product pages as well as in our risks overview. Please confirm you have read the information above.
Investing in an AIM ISA can offer a potential solution and upside
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Could an AIM ISA be suitable for your clients when looking at estate planning?
Latest figures show estates paid record amounts to HRMC between April 2023 and January 2024. With these figures expected to keep growing, it is no wonder that advisers are looking at different ways to mitigate this potential tax bill for clients. In this article, we explore how investing in companies listed on the Alternative Investment Market (AIM) market can be used as an effective estate planning tool and discuss what factors should be considered before investing.
The latest data suggests HMRC received IHT receipts of £6.3bn between April 2023 and January 2024, an annual increase of 6.3%. This puts the Treasury on course to take record IHT receipts of around £7.6bn for the 2023/24 tax year[1]. This rise can largely be attributed to the growing value of individuals' estates, often propelled by escalating house prices. Despite this, nil rate bands remain stagnant, exacerbating the impact of IHT on an increasing number of estates. Given that the standard inheritance tax nil rate band has remained at £325,000 since 2009, alongside the residential nil rate band of £175,000 being frozen to at least April 2028, more estates are going to be captured by inheritance tax. This tax is no longer confined to the uberwealthy, prompting a surge in interest among investors seeking strategies to mitigate any potential IHT bill.
Estate planning solutions
There are many options available to individuals who are looking to reduce their IHT liability. However, it's essential to recognise that not every solution suits every client, and the most suitable method depends on the individual's unique circumstances and their risk appetite. One of the avenues available to investors is investing in an AIM inheritance tax ISA portfolio. A regular ISA offers valuable tax benefits as it is free from income tax and capital gains tax so, it’s common for many clients to accumulate a substantial ISA pot during their lifetime.
While ISA are considered tax efficient, it's crucial to note that they are not exempt from inheritance tax. Therefore upon death, an investor may be liable to up to 40% tax on the value of their ISA.
An AIM ISA is a portfolio of AIM-listed shares, which benefit from the normal ISA advantages and should benefit from inheritance tax relief when held in an ISA wrapper. It's important to emphasise that the shares can only be free from inheritance tax if they are held for a minimum of two years and at the time of death.
Moreover, this solution provides clients with flexibility, granting investors access to their funds, subject to liquidity, in the event of changing circumstances. This feature sets this solution apart from other inheritance tax planning strategies, such as gifting or placing funds into trust, which may not always offer the same level of accessibility.
Why do the AIM shares benefit from inheritance tax relief?
An AIM ISA utilises Business Relief (BR). If investors hold BR-qualifying shares for at least two years, and at the date of death, no inheritance tax should be payable on their value.
An AIM ISA represents a higher-risk investment compared to a typical stocks and shares ISA portfolio. To encourage investment in UK businesses, the Government offers BR to compensate investors for taking additional risk.
Scenario of how an AIM ISA can work in practice
Mrs Thompson is 68 years old, never married, and wants to leave as much of her estate as possible to her only daughter.
Mrs Thompson has an estate worth £900,000, which includes a stocks and shares ISA valued at £100,000. Throughout her life, Mrs Thompson has tried to put money into her ISA and has now built up a considerable portfolio. Following a discussion with her financial adviser, Mrs Thompson is made aware that her ISA portfolio is subject to inheritance tax if she were to die.
The adviser assesses Mrs Thompson to understand her risk appetite, objectives and capacity for loss. After explaining the risks associated with this type of investment, the adviser recommends Mrs Thompson to transfer her stocks and shares ISA to a provider who offer an AIM ISA.
Mrs Thompson understands there is higher risk with an AIM ISA, compared to her existing ISA portfolio, but would like to follow her adviser's guidance.
Mrs Thompson can now leave her AIM ISA to her daughter free of inheritance tax, subject to having been held for at least two years and at the date of death. Upon inheritance, Mrs Thompson’s daughter can retain the shares or sell them, subject to liquidity.
Important notice: This example is for illustration purposes only and is not indicative of future performance. Tax rates are correct for the tax year 23/34 and subject to change. To keep the example simple, we have not taken into consideration ongoing fees. Downing AIM ISA has an annual ongoing fee of 1.5% + VAT and when buying or selling shares there is a bargain charge of £35 (capped at 0.5% every year). Downing AIM ISA does not have an initial charge but we have reflected the initial bargain charge. This illustration does not include potential financial adviser fees for the advice or potential transfer fees from the previous ISA manager.
It's important that investors understand that the risks associated with both ISA portfolios will likely be different. The share price of AIM-listed companies can be more volatile than larger companies listed on the London Stock Exchange.
What are the main risks of investing in an AIM ISA?
While this investment offers potential benefits, it's essential to understand the associated risks. Below are the key considerations, but it's important to review client literature before making any investment decisions:
As with any investment you make, capital is at risk. The value of a BR-qualifying investment can go down as well as up. Investors may not get back the full amount they invested.
Withdrawals aren't guaranteed, given that shares of unquoted and AIM-listed companies may be harder to sell compared to those listed on the London Stock Exchange.
This investment is not for everyone, as AIM-listed companies' share prices may be more volatile. Investors have to be comfortable with this potential volatility.
HMRC assesses BR eligibility on a case-by-case basis, with the evaluation occurring when an estate makes a claim. IHT relief is dependent on the BR-qualifying status of the portfolio company or companies at the time of death.
What is the AIM market?
AIM was launched in 1995, and over the past three decades, it has grown to become a major platform for businesses seeking to raise financing. At 29 February 2024, AIM was home to around 740 companies with a combined market cap of almost £76bn[2].
Although being perceived as London’s junior stock market, AIM has proven itself to be a strong addition to a portfolio, providing a wealth of attractive benefits. The AIM market is often referred to as the ‘growth market’, a launch pad where younger companies are given the opportunity to grow capital, equity and recognition in the earlier stages of their development. Growth success stories include names such as online fashion retailer ASOS, soft drink producer Fever-Tree or innovative data intelligence company GlobalData.
It’s crucial to acknowledge that not all AIM shares meet the criteria to qualify for BR. The knowledge of this, and the expertise required to construct a portfolio that seeks high returns across a range of sectors, is often entrusted to a professional investment manager.
Downing AIM ISA
Downing is a responsible fund manager, founded in 1986. We are experienced in inheritance tax solutions after launching our first estate planning service in 2007 and now have nearly £1bn of assets under management in inheritance tax solutions (as at 30 September 2023).
Downing AIM ISA is managed by an experienced team within Downing Fund Managers, our dedicated public equity investment team. The investment team carefully selects a portfolio of 25-40 companies that are listed on AIM. The team is led by Judith MacKenzie, Partner and Head of Downing Fund Managers, Judith was previously at Acuity Capital and Aberdeen Asset Management and has over 20 years’ small-cap experience.
We are an active manager, using ‘in-house’ experience of investing in small companies and taking time to get to know portfolio companies and what they need to succeed. Downing Fund Managers look to identify undervalued stocks in the smaller company universe (max. £500m market capitalisation at the time of investment) that we believe have the potential to provide strong returns. By focusing on companies with strong capital discipline, there is potential to provide the most beneficial shared total returns for the company, investors, employees, and the environment. This outlook leads to the possibility of more growth and possibly less volatility during market downturns.
With any investing comes risk, of course, and the share price of an AIM ISA can go down as well as up. Therefore, Downing provides Wealth Guard cover, which comes as a standard for all investors under 90 years of age. This unique covers investors against a drop in performance of up to 20%. The cost of this cover is met by Downing and is only guaranteed for the first two years of investing, although it will look to extend every year.
Investors in the Downing AIM ISA can also benefit from an optional Life Cover policy, which is designed to mitigate the risk of having to pay inheritance tax when your investment hasn’t yet qualified for business relief. Meaning if investors were to pass away within two years of investment, the insurance could cover the tax bill. Both insurance policies are subject to conditions, which can be found in the brochure or terms and conditions.
If you would like more information, please do not hesitate to get in contact with us on the below:
HMRC, HMRC tax receipts and National Insurance contributions for the UK, 21 February 2024
London Stock Exchange, Issuer List, 29 February 2024
Risk warning
This article has been approved and issued as a financial promotion under section 21 of the Financial Services and Markets Act 2000 by Downing LLP. Investment decisions should be based only on the relevant Downing AIM ISA product literature and your attention is drawn to the risk, fees and taxation factors contained therein. Nothing in this article constitutes investment, tax, legal or other advice by Downing. Capital is at risk. The value of investments and any income derived may go down as well as up and investors may not get back the full amount invested. Tax treatment is dependent on the individual circumstances of each investor and may be subject to change in the future.
Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
