Octopus Isa

Imnoexpert wrote: »

They also say it is a long term investment, but relative is in their 80s

Is this a reasonable thing to invest in?

What questions should relative ask the advisor?

If you compare the holdings to a typical UK equities fund , the ISA portfolio made up of qualifying AIM shares:

-has a relatively concentrated portfolio (manager's best ideas within qualifying criteria);
- is invested in companies at the small end of the scale which may have larger spread between buy and sell prices and may be illiquid

So, if a typical UK find could drop 40-45% in a crisis, a portfolio of 40 Aim shares could drop 60-70%. However, that's still much less risky than just pulling a few names out of a hat and dumping your wealth into a few qualifying AIM shares yourself.

The fees for running the portfolio for you (including a commission/advice fee on each underlying share purchase and an ongoing annual fee) with ISA wrapper are, inevitably, quite high. But Octopus are a credible organisation rather than some of the dodgy get-rich-quick or downright misleading promotions from an unlicensed operator that we sometimes see asked about here.

The effect of inheritance tax on a portfolio can be eye wateringly painful when you see it not as a once-in-a-decade 40% loss that you bounce back from after a few years of holding tight, but an unreturnable permanent grab of your assets by HMRC. Having £100 of assets is 67% better than paying IHT and having £60 of assets left. So the cost and headline risks might seem relatively high (especially if the portfolio performance from the markets is not superior to main market equities) but the risk adjusted returns (if you're able to use the IHT exemption on it all) has decent potential.

The person's overall wealth, longevity etc will be a factor in the value you get. Clearly saving 40% tax / getting 67% boost on the payoff after a couple of years in a risky product is more lucrative than if the person still keeps going for another 15 years to 'earn' that IHT reward (during which they could have been in lower risk products more suited to wealth preservation at the gross level). And if they are wealthy now but succeed in gifting away a large portion of it over the next decade and then end up consuming another few hundred thousand in a care home for their last five or six years, they may not end up truly needing the IHT "protection" on the whole lot they had put in the product.

Banana makes the point that it should 'not form a large part of their estate' but to be honest if you have an estate that's a million over the limit and you only put one years worth of ISA allowance in it as a punt, you aren't going to make much in the way of inroads into the IHT problem. A balance should be sought, with cognisance of the risk of the product.

As to what you or the elderly relative need to ask or know from your IFA to get comfortable, I don't know, as I'm not your family and I probably have a better base level of investment knowledge than your elderly relative. It's a niche product. But not one I'd discourage my family from using if they needed it, though for the moment, they don't.

It also has to be held until death I understand. How easy Is it to cash in, they say this is a risk.

It doesn't literally *have* to be held from now until death - i.e. you're not locked in and prohibited from exiting - but if the qualifying AIM assets aren't held at death they won't be exempted from IHT, which defeats the point in getting involved with a specialist product. So, don't buy with a plan to cash it in, especially given the fact that if you sell when markets are down you'll lock in a loss. If you're not sure you can afford to keep it until the end, don't buy it.

But in practical terms it should not be particularly difficult to cash in (it is not a fund where they would outright freeze redemptions) but they will give you a risk warning that the underlying assets might be illiquid (which is the nature of the AIM market). Certain assets within the portfolio could have a high spread (several percent) between their 'market value' (halfway between the standard buy and sell price on the market listing) and what you can get for them by dumping in a hurry at "fire sale" prices.

The amount of shares your relative would own in an individual AIM company in the portfolio would not be material to that company's valuation but if your relative and all the other Octopus clients at once were attempting to sell a particular stock on one day there might be insufficient demand in the market to absorb all the sells at a sensible price. That's not the case when you invest into big FTSE listed blue chip companies (where you need people dumping billions to cause a significant market movement) so it's worth flagging as a risk.

BananaRepublic wrote: »

Is this the fund?

https://www2.trustnet.com/Factsheets/Factsheet.aspx?fundCode=ITCOA&typeCode=FITCOAD&univ=T
.

No, that's a Venture Capital Trust which Octopus manage, a collective investment scheme structured as a corporate entity. It offers tax free dividends and CGT-exempt gains along with certain income tax breaks to investors who subscribe for newly issued shares in the VCT which the VCT then invests as new equity or loans into qualifying small early stage /startup companies (within certain parameters.)

Shares of a VCT are not exempt from IHT so they can be useful for wealthy people with high income tax bills but would not be bought for IHT-relieving properties.

It is possible there are some AIM funds available within an ISA which have a long performance history which would give some degree of confidence although obviously past performance is no guarantee of future performance. The idea of such funds is that although many companies will go belly up, those that succeed will do well, and so the net gain is positive. That after all is how venture capitalists make their money. The problem of course is how to select the companies to avoid too many dogs.

As an example the Cavendish AIM Fund B has performance over 10 years of about 10% per annum which is excellent. It would be more interesting to see how it fared over 5 years before and 5 years after the great crash. In fact it would be interesting to see long term data over various crashes, not just the mother of all crashes.

bowlhead99 wrote: »

Just a comment here that this advice is presumably only for a sense check of how volatile AIM portfolios can be,

Yup.

bowlhead99 wrote: »

rather than as any kind of IHT planning. "AIM funds" and "AIM VCTs" are regulated collective investment schemes and if you own them when you die they come into the IHT calculation just like other types of funds.

That's the case whether or not in an ISA; something that happens to be, "available within an ISA" doesn't make it IHT efficient.

Yup. Obviously the OP would need to find an IHT exempt AIM ISA. Of course it might be that the Octopus is the only one of its kind, a sad and lonely cephalopod.

bowlhead99 wrote: »

Whereas the Octopus AIM portfolio product is buying you your own set of individual companies which are not listed on a main stock exchange (only on the junior exchange) and can therefore qualify for business property relief.

Also, caution should be exercised when trying to get an idea of the likely performance of AIM portfolios from quite different products and then using that as an idea of what the Octopus product could do.

That was not my suggestion. Rather I was suggesting to the OP that they do some research into the AIM market, to get a feel for its volatility, and see if there are other funds which have a) long term performance data and b) are IHT exempt after 2 years.

bowlhead99 wrote: »

A fund whose remit is to invest with a focus across AIM generally (which can also include large ish companies that are AIM listed but also dual listed on Australia or Canada or HK or South Africa) may be less volatile than the IHT portfolio which has to avoid those shares.

Also some AIM-focused funds you'll find may allow x% in former AIM companies, or y% non-AIM smallcap, which again might be quite a bit more stable than someone who has to create a portfolio using only what's both a) on AIM right now and b) can qualify for IHT benefits or VCT tax breaks etc.

OP: Can I assume that the financial advisor is an IFA?

BananaRepublic wrote: »

That was not my suggestion. Rather I was suggesting to the OP that they do some research into the AIM market, to get a feel for its volatility, and see if there are other funds which have a) long term performance data and b) are IHT exempt after 2 years.

As mentioned, you can't invest into a "fund" that has long term performance data and is IHT exempt after two years. Funds are not IHT exempt after two years. The IHT exemption comes from business property relief which requires your qualifying investments to be in private or AIM listed operating businesses which do not hold other companies in the manner of an investment vehicle

So, this product is a portfolio service where investments are made into qualifying companies on your behalf for a fee, creating you a portfolio.

Yup. Obviously the OP would need to find an IHT exempt AIM ISA. Of course it might be that the Octopus is the only one of its kind, a sad and lonely cephalopod.

Other wealth managers doing IHT avoidance portfolios would include the likes of Hargreave Hale, Charles Stanley, Investec etc. CS and Investec are bare minimum of £100k under management; Octopus's is more accessible. HA-H allows for smaller IHT portfolio within your wider wealth but charges a premium on top of the standard management fee if you wanted it to be an ISA.

The old adage "don't let the (tax) tail wag the dog" is perhaps relevant here if you are averse to risk, though as mentioned the risk is mitigated to an extent if the alternative of a significant IHT burden is basically what's funding the risk taking.