InvestmentsAug 6 2014

‘IHT Isa’ anniversary met with mixed reception

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Doubts still remain about the risk tolerance of a key target demographic for so-called ‘IHT Isas’ that allow access to shares held on the Alternative Investment Market, one year on from the rule changes that brought them into being.

Yesterday (5 August) marked the one-year anniversary whereby AIM shares could be held in Isas. Aim stocks were originally banned from being used in an Isa, but the government launched a consultation in March 2013 looking into removing the restriction.

The move was welcomed as a way to diversify Isa holdings and broaden the investor base for Aim-listed companies, although concerns were raised around the volatility of some Aim shares making investors reluctant to hold them as no relief would be available for capital losses.

The rule change also meant that money invested in an Aim Isa would also benefit from becoming exempt from inheritance tax after two years, when the shares qualify for business property relief. Some even heralded the changes as bringing about the ‘IHT Isa’.

Speaking to FTAdviser, independent investment adviser Adrian Lowcock said while he welcomed the change, interest in Aim shares was always likely to be limited given the risks involved in smaller companies investment.

He said: “Using the rules for inheritance tax planning was certainly a possibility, but only really to those willing to take the risks.

“Given the size of Isa allowances relative to people’s estates it is likely to reduce the tax-bill marginally. The majority of Isa Investors look for Aim shares as a way to grow their investments before converting them into income producing assets in retirement.”

Patrick Connolly, certified financial planner at Chase de Vere, agreed that while smaller company shares are usually more dynamic and have greater growth potential than larger firms, they are “not only less secure than larger ones, with less financial backing, but their shares are more illiquid, with fewer people willing to buy them when times are hard”.

He said: “Investing in Aim shares is only suitable for those who are prepared to accept the high risks and even then only for a small proportion of their overall investment portfolio.

“While Aim shares can provide relief from inheritance tax if held for two years, for most people the investment risks will outweigh the tax benefits.”

Octopus Investments launched an Aim-listed Isa last September, which now has £78m under management and around 1,400 clients.

Richard Power, head of the smaller companies team at Octopus Investments, told FTAdviser that the portfolio size has fallen to £65,000 to £70,000 and clients are seven to eight years younger than the 75 to 80 year old average foran alternative non-Isa IHT planning product, but it was too early to draw any conclusions.

He said: “This product has been of interest to the transfer market, but it’s not for everyone, investors usually have previous exposure to and experience of equities. We work with IFAs to make sure clients understand the higher risk profile.”

Speaking more broadly about Aim performance in the year since the change, Mr Power added that the value of the market has grown by more than 25 per cent over the period.

He said: “While this positive momentum cannot be solely attributed to events a year ago, the change in Isa rules really helped to boost the profile of Aim among investors and demonstrated a genuine confidence in the market from government, a development that was further supported through the abolition of stamp duty in April this year.”

Graham Spooner, investment research analyst at The Share Centre, said they have witnessed a 5 per cent increase in the number of Aim stocks purchased, of which 30 per cent are in Isas.

He said: “This signals that the change in regulations has increased interest in the lower market cap companies, with 6 per cent of our Isas now holding Aim.”