The reason most investors look at AIM is because of tax. Tax is the driver.
The investment providers explain, if you invest into AIM ISA, you’ll save 40% tax; so even if your investments fall in value, a portfolio is unlikely to fall by more than 40%, so what have you got to lose? Yes, it’s a great sales pitch.
If you have ISAs and are concerned about IHT, it appears at face value AIM ISAs are ideal. You can stay invested in your ISAs and save IHT. You can see the tax advantages below.
But are you asking the right questions?
Let’s imagine you are aged 65 and with luck have at least 25 years ahead of you. Your estate would pay IHT in the event of your death. You have accumulated significant investment assets with ISAs. Your adviser explains that if you allocate your ISAs into AIM ISAs, you will still be in control but after 2 years, they are exempt from IHT.
Clearly, if you transferred into AIM ISA, and the value remained the same but you died after 2 years, the decision to transfer, from a tax perspective would have been brilliant. If you are healthy, however, the 2-year rule is less of a milestone. To qualify for the IHT benefits you need to remain fully invested. That means you could be fully invested for 25 years. But if you remain invested in AIM for 25 years, what will the investment AIM performance be like? In addition, the costs of running AIM portfolios are not inexpensive. Moreover, a lot can happen in 25 years in terms of estate planning. If you end up spending your money invested, then the AIM ISA was unlikely to be of benefit.
Essentially AIM ISAs are a packaged solution to sell to investors. Why use a packaged solution?
In our example, if you remain invested for 25 years, it may have been easier to gift money out of your estate. Of course, there are various strategies to minimise IHT, but each one starts by having an estate plan.
On the presumption you now have an estate plan, you can then investigate how your money is managed. You may decide AIM ISAs are right for you. You could employ portfolio managers to build you an AIM portfolio if you feel that is the best course of action, alternatively, you could do some of the investing yourself. and build your own IHT portfolio.
If you are thinking of using a portfolio manager, you need to be clear about performance and risk. In our experience, portfolio managers will explain how good performance has been, yet when we look back at individual clients who have been invested, often the expectations of performance and reality are somewhat different. Remember, it is the job of portfolio managers to make their service look great…if they didn’t you wouldn’t invest. So beware of bias.
If you want to feel more in control over your money, or part of your money, why not make your own decisions. To become a successful investor, having a process is essential. If you are not sure what to do with any AIM holdings you have, or whether this type of investment is right for you, contact us now.
Tax advantages of holding AIM shares in an ISA
You won’t be taxed on dividends from AIM shares held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make. If your investments aren’t held in a tax-efficient wrapper, you’ll be taxed on profits above the annual CGT allowance, which in the 2021-22 tax-year is £12,300. The standard CGT rate is 10%, while the higher rate is 20%.
Dividends received in ISAs are also exempt from tax. If investments are held outside an ISA, the Dividend Allowance means that individuals receive their first £2,000 in dividends tax-free, but any dividends above this amount will be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. There is also no stamp duty on shares traded on the AIM whether or not they are bought in an ISA.
There are other tax advantages for AIM investors, whether or not they hold their shares inside or outside an ISA. Most AIM stocks are exempt from inheritance tax (IHT) if they’ve been held for more than two years, and depending on individual circumstances it may be possible for AIM shareholders to qualify for the income tax and CGT reliefs when held via an Enterprise Investment Scheme, or through CGT Entrepreneurs Relief.
Remember that the value of tax relief and tax-efficient accounts depend on your personal circumstances. Please be aware that the level and basis of tax can change. These changes may affect both future opportunities and your existing arrangements.
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