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AIM to cut tax with these stock and fund picks

AIM to cut tax with these stock and fund picks

by David Kempton Sep 19, 2016 at 11:52

As a convinced and wounded (not mortally) ‘remainer’, I have enjoyed (so far) the honeymoon period of calm and gently rising markets with the fall in sterling considerably helping our exporters. 

In the FTSE 100, 80% of revenue comes from overseas earnings, 50% in the FTSE 250, the more useful measure of the economy. 

The UK has yet to invoke Article 50 of the Lisbon Treaty and Theresa May has pledged not to trigger this until 2017 at the earliest, but faces increasing pressure from the European Union to bring this forward. 

We hear unofficially that Whitehall bureaucracy is currently unprepared for these negotiations, whilst the European Commission still has unhelpful divisions among the remaining 27 member states. 

Whilst all this goes on, we’re not doing too badly with unemployment staying low and even ‘my’ recruitment company in 10 northern industrial towns enjoying strongly improving weekly figures amid increasing confidence.  

The Bank of England forecasts the economy to reach its nadir in 2017 and maybe this is already built in, although mortgage approvals, a key leading confidence indicator, were down 10% in July year-on-year whilst in Europe, German exports fell at their fastest pace for over a year in July and 10-year bund yields have gone above zero as bonds fall globally.

UK trade to the EU has fallen from 60% in the 90s, to about 45% now, forecast to be below 30% by 2050, driven by weak long-term growth in the EU, with overseas demand for British goods and services growing strongly. There is clearly enthusiasm in Australia, New Zealand, China and particularly India where the UK is the biggest G20 investor. India meanwhile invest more in the UK than in the rest of Europe combined, all of which augurs well, but could, alarmingly, take 10 years to ratify.

Both Credit Suisse and Morgan Stanley have cancelled predictions of a post-Brexit recession and revised economic forecasts upwards. 

Infrastructure cheer

Then there is chancellor Philip Hammond’s first Autumn Statement on 23 November to cheer us with hints of further infrastructure spend. We know now that political expediency has probably swung the Hinckley Point C decision, which, as an engineer and international contractor of 30 years, I always opposed. 

A negotiated project with no realistic competition is a contractor’s dream. We can only hope that government is tough enough and suitably organised to monitor extra cost claims from the French and Chinese operators. 

Hopefully we might soon get the desperately-needed London airport decision and more spending on the great northern powerhouse, where an improved rail link between Manchester and Leeds is surely more urgent than HS2.

I’m even feeling slightly more confident about stability in the City, persuaded that our financial services have the indisputable benefits of language, time zone, expertise, infrastructure and history, located in London’s wonderful cultural mecca which will continue to hold many of the world’s financial elite.  

Whoops, I’m starting to sound like a Brexiter – better watch that. Humble pie – certainly not, Brexit hasn’t even happened yet, so far nothing has changed and there’s a long haul ahead.

Remember that the EU is negotiating from a position with 16% of their exports reaching us (the same as the US), while 45% of our exports are to the EU. Who needs each other the most then? We start those negotiations rather on the back foot, as they well know. 

However, the Brexit result did not cause anything like the market disturbances that most of us feared. Sterling took the brunt, down 17% against the euro since Christmas, which actually helps exporters.

Increasing confidence

By late July I was feeling more confident so decided to put some ISA money into an Alternative Investment Market inheritance tax planning service, to enjoy the significant tax concessions.

As with any ISA investments, you can invest a maximum of £15,240 in tax year 2016/17 and pay no capital gains tax on shares nor income tax on dividends.

If the shares are in AIM companies and qualifying (nearly all do but not property companies, nor business that exist for investments, plus some other miscellaneous exclusions, including cash not used for a business purpose) they are eligible for business property relief, and so are not subject to inheritance tax if held for a minimum of two years.

Hence invest your ISA funds into qualifying AIM stocks and you pay no capital gains tax, no income tax on dividends and the shares may be free of inheritance tax after two years.

I gave a third of my AIM ISA money each to two fund managers. One was Hargreave Hale, where the renowned Giles Hargreave has been running several of UK’s most successful growth funds for some years. His team's stock picking abilities are well established and very highly regarded.

The other was Hawksmoor Investment Management, where I am a director. Chief investment officer Jim Wood-Smith has assembled an able team to run a portfolio of AIM stocks specifically designed to give inheritance tax protection; performance is also impressive. 

I used the remaining third to invest myself. Many of the companies I invested in I have mentioned before, but others I haven’t, and will comment on them another time. My portfolio consists of: 

  • data technology company Arria NLG (NLG);
  • car dealership BCA Marketplace (BCA);
  • legal financing fund Burford Capital (BURF);
  • billing software provider Cerillion (CER);
  • retail group Conviviality (CVRC);
  • animal medicine developer Eco Animal Health (EAH);
  • healthcare company EKF Diagnostics (EKF);
  • airline caterers Journey Group (JNYJ);
  • storage company Lok’nStore (LOK);
  • loan agency Morses Club (MCLM);
  • oil explorers Serica Energy (SQZ);
  • beauty products maker Swallowfield (SWL);
  • marketing company XL Media (XLM);
  • builder Watkins Jones (WJG);
  • biotechnology company Bioventix (BVXP).

Do bear in mind that AIM stocks are more risky than fully listed shares, but then if they weren’t you wouldn’t be able to benefit from these favourable tax concessions.  

Spread the risk to at least 10 stocks, run the 20% stop loss rule and don’t panic during the bumpy markets which surely lie ahead.

If you worry about what effect a president Trump would have on global markets, the dollar, policing the world and NATO, then it seems sensible to me to have a very competent team watching your money 24/7, something most of us find hard to do. Invest your core money with a respected, proven fund manager – not just one which hits the highs in bull markets but actually stands out when the going gets tougher.

I hold my cautiously managed core money in Hawksmoor’s Vanbrugh and Distribution funds, which are up an impressive 11% and 12% this year, with very low volatility, but there are many other excellent similar funds.

David Kempton is non-executive chairman of Hawksmoor Investment Management. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

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Comments  (9)

  • andy mac: 

    Sorry am I missing something

    In the article there is a statement

    'Hence invest your ISA funds into qualifying AIM stocks and you pay no capital gains tax, no income tax on dividends and the shares may be free of inheritance tax after two years.'

    surely if they are in a ISA then it depends what happens to the ISA.

    If you cash the ISA I didnt think there was any tax. If you die then it depends on who inherits, I had assumed that if it stays withing the ISA inherited by spouse then surely it remained tax free. Im confused

    Hopefully we all live long enough to make then tax free

    14:34 on 19 September 2016

  • Micawber: 

    IIRC a spouse does not inherit your ISA holdings, but a right to a special ISA allowance that year equal to their portfolio value in cash.

    So the inheritance tax exemption for qualifying AIM stocks inside or outside an ISA is worth having; David just makes the point that if you hold qualifying AIM stocks in an ISA you don't pay any kind of tax nor indeed stamp duty on buys.

    If you stick to respectable AIM stocks already in profit and paying dividends, and avoid small oil and mining stocks as well as the wonder material or wonder drug type of cash-burning startup, it seems to me you would be very unlucky if the portfolio collectively dropped by 40%, the rate of Inheritance tax. I set up a virtual AIM pf of such stocks in July, to watch for a while. So far, up 7.3%

    16:14 on 19 September 2016

  • Colin Burn via mobile

    16% of EU exports to us kinda dwarfs our 45% to them in value terms so the conclusion is totally flawed.

    AIM tips look good. VCTs are another. Giving money away makes you feel good and after that there are less worries. Use a SIPP. You reclaim your tax. You can put into drawdown and get25% back. Draw nothing more but start another Sipp. Wats the charges. When you die Sipps can be passed on IHT free. The recipient just pays tax on the drawdown.

    19:39 on 19 September 2016

  • RBNF: 

    I started an AIM portfolio 4 years ago.

    Not all AIM stocks qualify for IHT relief.

    Companies not qualifying are those wholly or mainly in dealing in securities, stocks or shares, land or buildings or in making

    or holding investments and those with certain overseas listings.

    It is a tricky area- I use the Investors Champion website to check potential investments out.

    Looking at David Kempton's list for instance -

    Investors Champion has Burford as a no, & Lok 'n' Stor questionable

    After a few disasters I tend to stick with AIM 100 companies although that doesn't guarantee immunity !!

    I also read Simon Thompson in Investor's Chronicle but carefully-he has got it wrong a good few times & of course when he advises he has sold off the price I have got has been dramatically lower!!

    10:42 on 20 September 2016

  • Thrugelmir: 

    "Remember that the EU is negotiating from a position with 16% of their exports reaching us (the same as the US), while 45% of our exports are to the EU. Who needs each other the most then? "

    The EU is not yet a single state. When push comes to shove there are many vested interests. What would the UK source from Latvia?

    12:48 on 20 September 2016

  • richard tomkin: 

    Never invest purely for a perceived tax-favoured status,as investors in Majestic Wine have recently learned to their cost.

    16:44 on 25 September 2016

  • Carol Schwille: 

    Could someone please confirm that by 2021 there will be 175,000GBP Main Residence relief from IHT in addition to the 325,000GBP totalling 500,000GBP. In my case both these reliefs will be used fully.

    Do I understand that in addition to this amount will there still be IHT relief on Qualifying Aim share(assuming they have bee held for 2 years) which can be deducted from the remainder of the estate, or is BPR only available if the Main Residence Relief is not fully used

    06:49 on 10 November 2016

  • busy bee: 

    Can someone please clarify :

    1. Can you hold AIM stocks WITHIN an ISA and they (might) still qualify for IHT exemption if HMRC say so ? and of course they are income tax and CGT tax free as that waht the ISA wrapper gives you.

    I thought you had to hold AIM qualifying stocks outside an ISA so they qualify for no IHT as the ISA CGT (assuming no spouse) rules would come first and your estate woudl be subject to IHT.

    09:18 on 25 September 2017

  • RBNF: 

    Yes I certainly hope so see this link http://www.telegraph.co.uk/investing/shares/isa-2017-can-keep-inheritance-tax-break-aim-shares-get-promoted/

    19:32 on 25 September 2017

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