Advertorial: Inheritance tax, ISAs and the Alternative Investment Market

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Death, tax and demographics

Advertorial: Inheritance tax, ISAs and the Alternative Investment Market

Richard Power, head of Quoted Smaller Companies at Octopus Investments, answers questions on how investors are benefiting from participating in AIM. 

Q. Why are ISA investors turning towards the Alternative Investment Market?

A. According to HMRC, there are 21.7 million adult ISA holders in the UK today, holding more in cash ISAs (52%) than stocks and shares ISAs (48%). But some high street banks are now paying just 0.01% interest to instant access cash ISA customers. And thanks to the Personal Savings Allowance introduced in April, the first £1,000 of interest earned by basic rate taxpayers (£500 for higher rate taxpayers) is completely tax-free anyway.

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It is three years since shares listed on the Alternative Investment Market (AIM) became eligible for inclusion in Individual Savings Accounts (ISAs). An ISA invested in AIM-listed stocks may appeal to investors who are happy to take additional risk with their investment in order to pursue growth within an ISA wrapper. It’s no surprise that investors are looking towards AIM in the hope of getting their ISAs to work harder.

AIM has matured a lot over the years. Ten years ago, companies making an AIM initial public offering had an average market capitalisation of £17 million. Today, the average is nearer £75 million. Well-known brands such as Hotel Chocolat, Joules and Comptoir Libanais have all floated on AIM in recent months, and it will continue to attract very profitable, successful businesses. Successive governments have remained supportive of AIM, and AIM is increasingly popular with ISA investors, with Self Invested Personal Pension (SIPP) holders and even with institutional investors.

Q. Is inheritance tax planning another selling point for AIM?

A. Most ISAs are subject to inheritance tax. So, someone wanting to leave their £100,000 cash ISA to their children or grandchildren could land them with a £40,000 inheritance tax bill. But some AIM-listed companies qualify for Business Property Relief (BPR). Upon the investor’s death, shares that qualify for BPR can be left to beneficiaries free from inheritance tax as long as the shares have been held for at least two years at that time. Transferring existing ISA holdings into a portfolio of BPR-qualifying companies listed on AIM could prove to be an effective way to ensure an ISA lives up to its tax-free billing – before and after death.

Including BPR-qualifying investments as part of estate planning means clients retain access to their investment, freeing up their options somewhat. They can look to build capital value free from lifetime taxes, choose to take a regular income, or dispose of their holding should their circumstances change. The ability to transfer share ownership between spouses, following the death of the first spouse, without ‘resetting the clock’ on the two-year BPR qualification period, is another key benefit.

Q. Can you describe your process for selecting AIM stocks? 

A. We create growth portfolios, featuring solid predictable businesses, for clients with an appetite for equity risk. The average market capitalisation for our portfolio companies is over £400 million. These are businesses that are quite established. We don't trade in and out of AIM companies, but look to become long-term ‘co-owners’. Of the 47 companies we currently hold within our AIM inheritance tax portfolios, we have been investors in more than half for ten years or longer, sharing in their growth journey.