AIM to Reduce IHT

This week Gordon Scott our Head of AIM service at P1 has written about the benefits that holding a AIM portfolio can create for your clients.

The freezing of the nil rate band for Inheritance tax since 2009 has seen the importance of IHT planning tools for Financial Advisers increase in recent years.? Looking forward, the importance of IHT planning is likely to increase as research from the Centre for Economics and Business Research (CEBR) estimates that ￡5.5 Trillion will be passed onto the next generation over the next 30 years. The same research suggests an increase in annual intergenerational wealth transfers from ￡69bn to ￡115bn. The Office of National Statistics (ONS) shows that IHT receipts for the 12 months ended April 2023 rose to ￡7bn, ￡1bn more than last year.

In light of this the use of AIM IHT portfolios has increased markedly too. However, AIM IHT portfolios have always been used with restraint by advisers due to a perceived misalignment of risk and time horizon.?

We do not believe that this is as acute a problem as advisers think and we have recently completed some risk mapping to greater understand this.?It overlooks some attractive features of AIM investment as a means of reducing your IHT liability too.?

Risk Mapping

In order to illustrate to advisers that they should pay greater attention to AIM portfolios as an IHT planning tool, we recently completed some risk mapping.? The purpose is to show the acceptable proportion of a client portfolio that can allocated to AIM whilst leaving the investors risk level unchanged. We have combined our model portfolio benchmarks with the NUMIS Alternative Markets index. The volatility of the resulting portfolios is compared to the volatility of our Hybrid portfolios.

Our study reveals that AIM can be included even for cautious clients and that the diversification benefit increases as we move down the risk levels due lower correlation to the underlying portfolio.?Nevertheless, AIM portfolios could increase concentration in UK stocks or restrict income drawing strategies in some instances.

Flexibility

A key feature of AIM portfolios that we believe is often overlooked by advisers is flexibility.?Investors in AIM IHT Portfolios maintain control of their investments and benefit from the liquidity of holding listed shares.?Potentially this could be a key consideration as clients could remain uncertain as to their future care costs or a change in their circumstances.

Food for Thought

Finally, it is sometimes worth modelling a potential future scenario to fully understand the benefits of including an AIM IHT portfolio.?In the following example we have calculated the gain required from a portfolio that hasn’t planned for an IHT liability compared to one that has.

We would suggest that the achievability of the gains from the portfolio that includes the AIM portfolio are far more realistic.

This content is for investment professionals only and is not to be relied upon by retail investors. Nothing in this newsletter is to be construed as investment advice.?

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