Recent figures released by HMRC show that the UK is currently home to 2,000 ISA millionaires with an average £1,412,000 each in stocks and shares ISAs. This is a total of £2.8 billion sheltered from the taxman’s clutches under the wrapper of an ISA. However, heirs to these estates may not feel quite so smug when they potentially bear the burden of a £1.1bn inheritance tax bill, that’s equivalent to £564,000 for each deceased persons estate according to new figures released today from the Wealth Club.
ISAs, whilst tax efficient in many ways, are not normally free of inheritance tax – many people do not realise this. Therefore, anyone fortunate to have made it into the ‘ISA millionaire club’ could be taxed on the entire amount, especially once the main residence has been accounted for. Although it’s not just the super wealthy that are impacted by inheritance tax, as over the last tax year (2020-21) 33,000 estates were hit with an inheritance tax bill, with an average payment of £160,000.
However, by switching ISA’s including previous years’ allowances into a portfolio of qualifying AIM shares they could help to avoid this tax altogether. There are a few caveats to consider, firstly not all AIM stocks are included in the IHT relief and secondly, you must hold the ISA for at least two years before death. It should also be noted that investing in AIM can be riskier than investing in the main market.
Alex Davies, CEO Wealth Club said: “£2.8bn of money invested into ISAs is held by so called ‘ISA millionaires’ whose entire portfolio of ISAs may be subject to 40% on their death – that’s a staggering £564,000 of inheritance tax each! But this isn’t just a tax for the very rich to worry about as last year 33,000 estates paid an average £160,000 in inheritance tax each.
£620 billion is currently being held in adult ISAs and the greatest number of savers was in the 65+ age group and this age group also hold the highest average value of £52,590*, and while many pour money into these ISAs each year, many also have very little intention of spending it, and may be totally unaware that their loved ones could face a 40% tax bill on their hard-earned lifetime of savings.
With an AIM ISA you can invest this year’s ISA allowance as well as transferring across your accumulated ISAs from previous years.
Whilst it is perfectly possible to choose your own AIM stocks, many investors (even seasoned ones) opt for a professional manager to run a portfolio for them. AIM is very much a stockpickers market and to invest successfully requires a lot of time and effort. Whilst there are some great AIM stocks available there are some terrible ones too. In addition, not all AIM stocks qualify for inheritance tax relief. Furthermore, there isn’t a definitive list and what qualifies today might not qualify tomorrow.”
What are the risks? Unlike the main London Stock Exchange, AIM companies tend to be smaller and more volatile so do present a higher risk. That said, the IHT relief does give investors a 40% cushion, i.e. the ISA would have to underperform one invested in the main market by 40% before the IHT advantage was lost. In addition, if you choose a professional manager to run the portfolio for you, then your ISA is likely to be spread across 20-40 stocks which also helps to reduce the risk.
Who should consider AIM ISAs? Anyone over the age of 60 who’s concerned about IHT and is contributing every year to an ISA with few plans to spend it should definitely consider an AIM ISA. A couple paying each £20,000 a year into an AIM ISA could have a tax-free and IHT-free pot of just over £1.5 million after 20 years, assuming a 1.25% annual management charge and 7% annual growth, according to Wealth Club calculations.
AIM ISAs we like
- Octopus AIM IHT ISA is the largest of all AIM IHT ISAs, with over £2 billion invested in the service. The service is manged by the Octopus Quoted Smaller Companies investment team, a nine strong team dedicated to managing smaller company investments, including the suite of Octopus UK equity funds. One of the key tenets of the investment strategy is to back businesses with strong market positions. Therefore, companies in the portfolio tend to be larger than one might expect when investing on AIM. In fact, the average market value of the portfolio companies is £967 million, and less than 4% of the “buy list” is in companies worth less than £250 million. In our view the combination of a well-resourced and experienced team and an investment strategy focused on larger AIM stocks makes the offer worthy of consideration.
- RC Brown AIM IHT ISA Is a boutique investment management business with £329 million of AUM. It has offered its AIM IHT portfolio since 2018, in which it currently manages £34.3 million on behalf of its clients. RC Brown has a close-knit investment team. All members of the team – directors, managers and administrators – are equity shareholders or have equity options, which may translate into high levels of service for clients, and greater dedication from the investment team. The service has a simple and competitive fee structure. The lack of dealing fees could be appealing, especially if investing smaller sums, where dealing fees can have a disproportionate impact on returns. For investors considering an AIM IHT portfolio, this is a competitive offering from an experienced team, which could complement other AIM IHT investments which is why it’s one we like.
- Stellar AIM IHT ISA. Stephen English is a fund manager that we rate highly. The investment strategy is focused on smaller AIM-quoted companies, blending both “reasonably priced” growth stocks and stocks in special situations such as turnarounds, is differentiated from some other AIM IHT offers, which typically target larger AIM-quoted stocks. The fund may therefore offer diversification benefits to a wider AIM portfolio, although this is not guaranteed. The service currently has assets under management of £86.4 million. In order not to jeopardise the investment strategy, which seeks to back smaller AIM-quoted companies, the service is expected to close to new investors once it reaches £200 million.
Useful IHT statistics
- Inheritance tax payments during 2020-21 tax year totalled £5.4bn, This was a 4% (£190m) increase from the previous tax year.
- This has affected 33,000 estates who have been hit with a tax bill, which the Office for Budget Responsibility say is up by a third, with the average payment around £160k.
- If the IHT threshold stays as it is (which is the current plan until 2026) the Government will bring in an extra £1bn mainly based on the fact that the tax band hasn’t been increased since 2010, and house prices have and continue to rise.
* according to the latest figures from the 2019/20 tax year.