Type: Aim portfolio management service
Aim: Growth and income while reducing potential inheritance tax and capital gains tax liabilities by investing in Aim stocks
Minimum investment: Lump sum £100,000
Charges: Annual 0.7-1.5% depending on the amount invested, execution charge 0.65% on each transaction
Commission: Renewal 33.33% of the annual management charge
Tel: 020 7374 4100
This plan will manage a portfolio of Aim stocks to reduce potential inheritance tax and capital gains tax liabilities.
Putting this product into its market context, Origen Financial Services senior technical manager Bob Perkins says: “This is the latest addition to a growing number of plans that are designed to take advantage of the business property relief provisions within the inheritance tax legislation.
“The reason for the growth in their popularity is the changes that have affected other IHT planning options and their apparent simplicity. In recent budgets, the Government has made it plain that it is anxious to clamp down on tax avoidance schemes and various moves have hindered other means of IHT planning. For example POAT, changes to the tax treatment of trusts and the penal tax treatment of death benefits under ASP have been introduced.”
Perkins adds that AIM plans for IHT planning have obvious attractions in that investors don’t have to give assets away, they can still have access to income and capital and there are no complicated trusts to wrap around them.
“If the assets are sold after two years they will attract business taper relief for CGT – 10 per cent for a higher rate taxpayer instead of 40 per cent. If the assets remain qualifying, on the investor’s death, after two years’ ownership, they will attract 100 per cent relief from IHT,” says Perkins.
He points out that there is only a two-year waiting period rather than a seven-year waiting period under a PET or CLT before they fall out of account for IHT purposes.
“All of this assumes, of course, that the Aim shares will remain suitable for business property relief and that the rate of relief remains unaltered. If that is the case then someone who invests, say, £100,000 will potentially save tax for his family of £40,000 when he dies,” says Perkins.
“The plan is effectively a discretionary management service but the investment managers undertake to manage the investments within the client’s brief in relation to objectives and any restrictions. Of course, restrictions can hinder the efficacy of the managers’ investment decisions and it may be preferable to give them complete freedom,” he says.
Perkins notes the plan allows free access to capital and income can be taken if required, on a quarterly basis either as it arises within the portfolio or on a fixed basis. “ It should be remembered that the driving factor behind the investment is the IHT relief which means that to be effective the account will need to remain fully invested. Going into cash in adverse market conditions will mean that the funds are no longer in qualifying investments for Business Property Relief,” he says.
Perkins feels the minimum investment and charges are similar to other plans. ”In so far as initial commission is concerned, there is none as such but the IFA and client can reach agreement for a sum to be deducted from the initial investment for which AXA Framlington will require a letter of authorisation from the client. That amount will then be paid to the IFA directly from the capital before it is invested,” he says.
In Perkins’ view, the literature is fairly easy to follow and the risk warnings are clearly spelt out for investors. “Though the terms and conditions are detailed, it does set out very clearly how the plan will operate,” he says.
Turning to the potential negatives, his main concern is that investors might be tempted to let the tax tail wag the dog, to the extent that the potential IHT savings capture their attention at the expense of the very genuine downside risks.
“Fund managers will obviously take steps to limit that downside potential but there is no escape from the fact that Aim shares do offer a totally different perspective from the point of view of risk. Clients must understand that and be prepared to accept what it means.”
From a pure investment point of view, Perkins does not see it appealing so much to the average investor as those who are more sophisticated in terms of their attitude to risk. “Those who invest purely on the draw of the potential IHT saving could find that they make a costly error in judgement,” he says.
Scanning the market for competitors Perkins says: “There are an increasing number of providers both from fund management groups and stockbrokers. Some well-known names who are already established in the market are Close Brothers, Singer and Friedlander and Octopus.
Perkins concludes: “The success of these arrangements is largely dependent upon the ability of the fund managers not only to diversify and select their stocks but also to research the market. Research into the financial position and operations of Aim companies is sometimes difficult to get and what is needed is a management team with the resources to fully back their stock selection.
He thinks that the resources that are available to AXA Framlington must give it a significant degree of credibility in this area of the market. “Couple this with the team, and the service becomes a welcome addition to the others already available,” he says.
Suitability to market: Good
Investment choice: Average
Adviser remuneration: Average