Savers flock to risky stocks exempt from death taxes
More try to get around inheritance tax by filling up on smaller Aim shares, finds Harry Brennan
The amount of money flowing into inheritance tax-free stocks has quadrupled, as thousands more families face being caught by divisive death duties.
Almost £20m in new money has been invested into the Alternative Investment Market so far this year at the Wealth Club, a broker, up from £5m invested the prior year.
A number of shares listed on the market, a sub-market of the London Stock Exchange designed for smaller firms, benefit from full exemption from IHT. The number of people investing in portfolios made up exclusively of Aim shares that are exempt from the 40pc levy has more than doubled, the broker said.
The Wealth Club said the average age of investors with “Aim IHT portfolios” was 76, with the typical amount invested around £60,000.
The rise in usage comes alongside a five-year freeze in tax breaks announced at the October 2021 Budget. Locking the main £325,000 tax-free amount will catch thousands more families, as property prices and stock markets rise but the threshold remains the same. More than 36,000 estates a year are expected to pay the death duty by 2026, up from fewer than 25,000 in recent years, according to official forecasts.
It will cost families an extra £1bn and result in total receipts from the death tax soaring to an all-time high of £6.6bn by 2026.
The threshold has not risen since 2009. It would stand at more than £460,000 today had it risen with inflation each year since then.
Alex Davies, of the Wealth Club, said more people were looking to cut their bills and take advantage of legal reliefs to avoid paying more.
“With inheritance tax thresholds frozen until 2026, the amount families lose to IHT is only going one way and that is up,” he said.
‘The amount lost to inheritance tax is only going one way and that is up’
Of particular concern is money that has built up in Isas over the years, which will be subject to the duty on death. Unlike pensions, which are exempt from the death tax, Isas – which protect savers from all other types of taxation – are not.
However, by filling up an Isa with Aim shares that qualify for tax relief, families can shield the money they have accrued through years of diligent saving.
Mr Davies said many of these stocks would qualify for “business property relief ”, which was introduced initially to help family businesses be passed through the generations. He said: “If you hold these stocks in your Isa and do so on death, provided you have held them for at least two years, then they should be inheritance-tax free.”
Married couples can pass on up to £1m tax free by combining their £325,000 IHT allowances, plus their “family home allowance” of £175,000 each – an extra tax break for those leaving the family home to a direct descendent. Anything more than this will be taxed at 40pc.
A couple paying £20,000 a year each into a portfolio of Aim shares using their annual Isa allowance would have a 100pc tax-free pot of more than £1.5m after 20 years, assuming a 1.25pc yearly management charge and 7pc annual investment growth.
Iht-free Aim shares favoured by Questor, the Telegraph’s stock-picking column, include Naked Wines, the alcohol retailers; Boohoo, the online fashion website; and wealth advice firm Brooks Macdonald.
However, Aim companies tend to be smaller, making them a riskier investment. When markets crashed at the start of the pandemic, the FTSE 100 index of Britain’s biggest firms fell by a third, while the Aim market fell close to 40pc, although both have since recovered well.
Investors could choose to limit their exposure to larger Aim-listed firms. A number of companies have stayed on the junior market despite growing in size. There are around 30 companies valued at £1bn listed on the Aim market today.
To avoid the risk of putting all your eggs in one basket, Mr Davies suggested investing in a ready-made portfolio of Iht-free Aim shares.
“Of course it is perfectly possible to pick your own stocks. But unless you are a keen investor, we would suggest finding a manager to select the Aim shares for you,” he said.
“There are some great stocks in the pool but quite a few lemons, too. In addition, not all Aim stocks are exempt from tax and those that are today might not be tomorrow.”
Mr Davies warned that specialist Aim portfolios typically charged high fees. He tipped the £35m RC Brown Aim IHT portfolio for its “experienced management team”.
The portfolio focuses on larger Aim companies worth around £500m on average. It charges a 1.25pc ongoing management fee.
He also tipped the £86m Stella Aim IHT portfolio, managed by Stephen English. The portfolio focuses on smaller firms and charges an initial 2pc fee to investors, followed by a 1.5pc ongoing charge.