I received a direct marketing email from a company called Puma. They offer an AIM IHT service. Generally, we do not use these types of schemes unless there are specific circumstances, which are unusual. However, we do see investors with these types of schemes which have been recommended by other advisers.
There are many ‘sales’ angles to encourage investors to invest. But what don’t they tell you?
I have 2 simple points, not aimed at Puma, but at all AIM IHT schemes. It is generally agreed that AIM investments are risky. Yet for risky investments, the actual returns often are not what you would expect. In Pumas’s case they ‘sell’ the idea of not making less than 3%. In other words, they are relying on tax-saving to boost the investors’ return. They will say that based on £100,000 above the nil rate bands and other allowances, you’ll save £40,000 in tax. You could therefore argue, at 3% return, it doesn’t compare to 40% tax saving.
My point, if you are going to accept investment risk, you should be rewarded. 3% seems rather paltry.
Secondly, the magic of compounding. If you invest £100,000 at 3% compound after 5 years you have £115,000, 10 years £134,000, and 15 years £155,000. What if you only invested £60,000, assuming tax is paid with an 8% return. After 5 years you have £88,000, £129,000 after 10 years, and £190,000 after 15 years.
The analysis; investing on the basis of the tax tail wagging the investment dog only works up to a point. Clearly, in this example, 10 years is a tipping point. If you were aged 65 and could live 25 years or more, then an AIM IHT service may not be as appropriate as you may have first thought.
Of course, we have no idea about investment returns over time, so you have to carry out your own due diligence on these matters, but it’s to be remembered that AIM IHT schemes will be packaged to look attractive. That’s good marketing. It’s your job to make sure you fully understand your alternatives.
Whilst the thought of saving tax can be very emotionally driven, it should be remembered to employ intelligent thinking so that your emotions don’t override good advice.