Investors no longer have to choose between building an ISA and investing in business property relief-qualifying vehicles for IHT mitigation, writes Charles Stanley's Kris Barclay...
ISAs, as we all know, are useful tax-efficient vehicles. Until recently, however, their tax benefits have been limited to providing income and capital gains relief only.
For those of us who remember good old PEPs, where HM Revenue & Customs (HMRC) evolved the rules that led to the birth of ISAs, so too has it relaxed the rules on ISAs so that cash products can be merged with stocks and shares counterparts to create one big pool.
Furthermore, as of 5 August last year, HMRC permitted the inclusion of AIM-listed stocks within ISAs.
Many advisers have historically advised clients - rightly I am sure - to build up their ISAs owing to their superior flexibility, as compared to, say, locking money away in products or vehicles used for inheritance tax (IHT) planning.
What a quandary for investors: either plan for ready access to their funds and a choice of what it is invested in or commit to an IHT-efficient scheme that may have been dedicated solely to risky investments qualifying for business property relief (BPR).
Now, however, the advice might be to maintain that precious ISA, while, at the same time, allocate some of the funds to a stand-alone diversified portfolio of BPR-qualifying stocks.
While hardly suitable for all investors, financial advisers see these cases every day and this has given them a great opportunity to engage with their clients afresh.
Delicate hunting ground
As broad as the ever-growing AIM market is - and the list of qualifying stocks numerous enough - it is a delicate hunting ground, with things like company reporting requirements more relaxed than for main market listings. Liquidity is a significant consideration, too.
We all know that a brick dropped in the ocean makes barely a ripple but what if the market, limited by qualifying stocks, and those with reputable management and sensible valuations, meant it was more akin to a large pond? This would mean that said brick - any new monies flooding in from new investment on the back of, say, relaxed rules on ISAs - could create a substantial, albeit temporary, one-way current.
In spite of this, we may fear for the very largest AIM specialist managers in the industry whose businesses are built on AIM stocks. Although they, in the short term, should benefit from greater demand, because with the volumes they now need to deal in they also need to crosscheck the above criteria with those stocks that have the liquidity to cope with their large trades, looking further ahead, if and when the next recession comes and these handful of companies' shares are impacted, they may find themselves likened to standing in a puddle with little water left.
Currently, though, there remain plenty of sensibly valued AIM listed BPR-qualifying companies out there. There is, quite clearly, a sweet spot here. For those investors for whom it is appropriate, it may well be worth considering a standalone AIM portfolio as part of overall financial planning matters. With the new rules, this high-risk but useful IHT-mitigation strategy is certainly worth a closer look.
The Share Centre's Helal Miah and Graham Spooner recommend the following AIM-listed stocks as a ‘buy' for investors willing to take on a higher level of risk.
AGA Rangemaster manufactures high-end cooking appliances. The financial crisis had a major impact on the company's fortunes: during this period, it needed to cut costs but has done relatively successfully. After a slow start in 2013, there has been a noticeable pickup in activity.
Both the US and domestic economy are seeing a strong pick-up in housing markets, which should continue to support AGA's recovery. The group targets 50% of sales from outside of the UK and collaboration with Vatti Group to develop a range for the Chinese market should help reach this target.
Earthport is a financial services organisation that focuses on international payments for companies such as IBM, Bank of America and American Express. It allows financial service providers' customers to send money overseas more securely, at lower prices, knowing the up-front cost and expected time of arrival.
Full-year results were encouraging and, with a new management team introduced in 2010, the company has a great deal of industry experience in either cross-border payments or technology. We recommend Earthport as a ‘buy' as it attracts high calibre partners and customers, with a scalable platform that has barriers to entry.
Funds and VCTs
Of course, as Hargreaves Lansdown's Adrian Lowcock highlights, investors can also access AIM shares through unit trusts and VCTs. Do not forget, however, there is no IHT exemption when held this way.
Giles Hargreave, manager of the Marlborough Micro Cap Growth fund, holds around 70% of the portfolio in AIM Shares, and is a favourite among commentators.
"He has an impressive track record investing in smaller companies with the fund delivering a 288% return over five years, more than double the FTSE AIM index," says Lowcock.
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