Making this year’s ISA inheritance tax free – taking advantage of the AIM opportunity

7.1 million people over 65 have an ISA.^[1] What they might not be aware of is that in most cases assuming they are over the IHT threshold on death, 40% of their ISA pot will be lost to inheritance tax – probably the most hated of all taxes.

However, since 2013 a rule change has allowed investors to hold AIM stocks in their ISA. Many AIM stocks qualify for Business Property Relief – originally introduced to allow family businesses to be passed down the generations – which means providing on your death you have held them for at least 2 years, they can pass to whomever you wish IHT free.

Alex Davies, CEO and founder of Wealth Club says: “Many older and wealthier investors pour money into ISAs each year and have very little intention of spending it. What they might not be aware of is that, unless you pass an ISA on to a spouse on your death, those who inherit the pot could lose 40% to inheritance tax — probably the most hated of all taxes.”

However Davies says there are ways to avoid the “death tax”. He adds: “Investing in companies listed on the Alternative Investment Market (AIM) is one way to avoid paying IHT on your ISA savings. You have to hold them for at least two years; after that they could be passed to anyone after your death tax free.”

A couple each paying £20,000 a year into an AIM ISA could have a tax-free and IHT-free pot of nearly £600,000 after 10 years, assuming a 1% initial charge, 1.8% in total ongoing charges and 7% annual growth, according to Wealth Club calculations. These are typical charges for purchasing funds investing entirely in IHT-free AIM stocks.

Davies says: “I would argue that anyone over the age of 60 who is likely to have an IHT problem and is going to contribute to a stocks and shares ISA before the end of the tax year would be very wise at least to consider an AIM ISA.”

He tips the Stellar AIM IHT ISA, which has a 1% initial charge and 1.5% annual charge. “We have known Stephen English the manager for a long time. He is someone who sticks to his guns looking for companies with the best long-term prospects rather than being swept along by the latest fashions.”

Davies said he also likes the Unicorn AIM ISA, which also has a 1% initial charge and 1.5% annual charge when you buy it through Wealth Club. “This is a small fund but is run by one of the most successful smaller companies managers, Chris Hutchinson of Unicorn AIM Venture Capital Trust.”

However, investors should be aware that AIM IHT ISAs invest in small companies, which are generally more volatile and illiquid than larger companies and much higher risk.

Three myths about investing in AIM companies debunked:

1. AIM companies are small – In reality AIM is home to 816 companies with average market value of £114.2 million (Dec 2022). 39 companies are worth more than £500 million, 15 more than £1 billion. The average market value of the companies in the Stellar AIM IHT ISA portfolio is £306.1 million (Dec 2022).

2. AIM companies are very new – In reality plenty of mature, long-established companies are listed on AIM. For example, Young & Co.’s Brewery plc, a holding in the Unicorn AIM IHT ISA portfolio, was founded in 1831. James Halstead plc another of its holdings was founded in 1915 and has been in the same family for four generations.  

3. It is easy to choose your own AIM stocks – Whilst it is perfectly possible to choose your own AIM stocks, investors should be aware it’s not an easy option. There are some great companies on AIM, but many awful ones too – AIM really is a stockpicker’s market. Secondly, not all AIM stocks qualify for Business Property Relief and there is no definitive list of what does or doesn’t. So, you need to keep on top of it for as long as you hold them. You should also keep detailed notes of when you bought them. It’s time-consuming and you could well end up leaving a collection of AIM shares to your less-interested spouse or children and causing them a headache. The easier option for most people is to invest in a professionally managed AIM inheritance tax portofolio.