AIM stocks for an inheritance tax ISA in 2021

Find out how you can build a portfolio of AIM stocks that can help significantly reduce IHT.

There have been concerns about whether business property relief for inheritance tax (IHT) would continue in its current form. A review was commissioned into the subject, but there are no changes as yet. This is good news for AIM investors who can continue to use this tax break to avoid paying tax on the assets passed on to their inheritors.

The idea behind the perk is that founders of businesses can pass them on to their family without the need to liquidate assets to pay tax on the value of the transfer. A report published in 2019 did suggest a review on the IHT relief offered through investment in AIM shares. Nothing has come of this.

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So, investors need to be aware of the possibility of changes to, or the scrapping of, IHT relief. Investments are required to be owned for at least two years before they become eligible for the relief, so a longer-term outlook is required.

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Investing in good AIM companies means that even if the IHT relief is removed there will still be a good underlying investment. An Individual Savings Account (ISA) cannot be transferred after death, but the eligible AIM shares in the ISA can be transferred to beneficiaries of a will without counting as assets subject to IHT. This makes an ISA an attractive method of investing in AIM shares eligible for IHT relief. 

AIM qualifies for IHT relief because it is not deemed to be a designated recognised stock exchange, and the shares are deemed to be unlisted. Examples of a designated recognised stock exchange are the Official List of the London Stock Exchange or Nasdaq. Shares traded on the Apex and Access segments of the Aquis Stock Exchange also qualify for IHT relief.

IHT-related investments and portfolios represent an important component of the cash invested in AIM companies.

Views on how much of the money invested in AIM is for tax planning reasons vary. In the past there have been suggestions that between one-fifth and one-third of money invested involves a tax angle, although that would also include capital gains tax relief and presumably any money invested in an ISA.

Demand from IHT investors certainly boosts the ratings of some of the AIM companies with longer track records of profit and dividends, such as soft drinks maker Nichols (LSE:NICL) and floor-coverings supplier James Halstead (LSE:JHD).

Not all AIM companies qualify, though, and there is no specific list of qualifiers – so investors need to be careful. Generally, the eligible companies are required to be trading businesses and not investment companies or property companies. It is important to check if a particular AIM share will be eligible before investing.

Ready-made or DIY?

Individuals can buy AIM shares themselves or invest in an IHT portfolio run by a fund manager. Some of the managed portfolio investments are held in ISAs and there are fund managers with hundreds of millions of pounds worth of AIM shares in their IHT portfolios.

Octopus Investments is probably the biggest fund manager in the AIM IHT arena. The median Octopus portfolio has grown by 247.6% over the past 10 years. Other fund managers offering AIM IHT portfolios include Invesco, Downing and Fundamental Asset Management.

How my IHT portfolio picks have fared

In March 2018, I made six suggestions for a IHT portfolio. The performance (see table below) shows that the portfolio approach is important. The share prices of two of the recommendations have fallen, but the others have risen, and the AB Dynamics (LSE:ABDP) share price has more than doubled – there should be more to go for, though.

In just over three years, the portfolio has increased in value by 35.2%. They have also each paid dividends in the past, although some are not paying them now. In the same period, the FTSE AIM All Share index has risen by nearly one-fifth.

This shows that picking relatively safe trading businesses can produce steady gains ahead of the market performance.

Utility connections business Fulcrum Utility Services (LSE:FCRM) was a big disappointment, but a new management team is turning the business round. There is scope for the share price to bounce back and the requirement for more hew housing should provide a strong market for the company.

The other five companies are still good long-term investments. Johnson Service Group (LSE:JSG) has done reasonably well given the focus on hotel and catering linen supply, that was only partly offset by the workwear business holding up much better. The share price had more than doubled by the end of 2019 and it should recover when demand builds up again.

Alliance Pharma (LSE:APH), photonics supplier Gooch & Housego (LSE:GHH) and transport consultancy and software provider Tracsis (LSE:TRCS) have all been affected by Covid-19 lockdowns to varying degrees. They remain profitable and will be even more profitable when their markets return to more normal levels.

Shares with a strong track record, growth prospects and dividends are ideal for this type of investment. More speculative investments can be made, but they should not be entered in to purely for the IHT relief. That is true of any investment, though. 

Here are three suggestions for an AIM IHT portfolio. They are not cheap shares, but they have good track records, and their profit and dividends should continue to increase.

Renew Holdings

Renew Holdings (LSE:RNWH) has focused on providing regular maintenance services for rail, water, nuclear and telecoms. This means that business has held up during the past year. The engineering services order book was worth £583 million at the end of 2020.

In the past few weeks,Renew has acquired water infrastructure company J Browne Group for £29.5 million and this is immediately earnings enhancing. The Enfield-based business provides services to water companies and developers, where it provides utility connections. In the year to March 2020, pre-tax profit was £5.5 million, but there has been a reduction in activity this year due to the change in the regulatory period for the water industry. Work will build up as the latest regulatory period progresses.

Interim figures will be published on 14 May. The full year pre-tax profit forecast for 2020-21 is £43.2 million and the prospective multiple is 14 – based on a share price of 620p. The forecast yield is 2.2%.

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Next Fifteen Communications

Marketing services provider Next Fifteen Communications Group (LSE:NFC) has been building up its digital operations even before the Covid-19 lockdowns. This has helped Next Fifteen to continue to grow organically on top of the acquisitions it has made.

In the year to January 2021, Next Fifteen increased revenues by 7% to £266.9 million and underlying pre-tax profit was 22% higher at £49.1 million. Acquisitions helped but underlying earnings jumped by 17% to 40.7p a share. The total dividend is 9.5p a share – the ex-dividend date for the 7p final dividend is 8 July. The forecast yield is 1.1%.

Net cash was £14 million at the end of January 2021 and there are plans to return furlough cash. Since January, Next Fifteen has acquired Shopper Media, which is a data driven marketing business, for an initial £15.7 million in cash and shares. In the year to September 2020, the business made a pre-tax profit of £3.5 million.

The Next Fifteen share price has been particularly strong this year and has risen to 860p. This year pre-tax profit is expected to reach £57.2 million, and the shares are trading on 18 times prospective earnings.

Strix

Kettle components supplier Strix (LSE:KETL) has a dominant position in its core market, while there is substantial growth potential for newer areas, such as water filters. Kettle controls could contribute less than 50% of revenues by 2025.

In 2020, revenues were 2% lower at £95.3 million, while underlying pre-tax profit was 2% ahead at £30.9 million, including a small contribution from last autumn’s acquisition Laica, which broadened the range of products. Total dividends were raised by 2% to 7.85p a share.

Strix is on course to open its new Chinese facility in August. That will replace two existing factories and provide additional capacity for growth. A 2021 pre-tax profit of £33.5 million is forecast. At 290p, the prospective multiple is 19 and the forecast yield is 2.8%.