Logic Investments and Islamic Finance Guru (IFG)'s new Sharia compliant AIM portfolio to provide a vehicle for affluent British Muslims to manage their inheritance tax obligations.

London: The UK’s AIM (formerly the Alternative Investment Market) is a unit of the London Stock Exchange consisting of medium to smaller firms that are not large enough to list on the larger exchange or conduct an IPO. AIM quoted companies are considered riskier because they have less stringent disclosure requirements with financial accounts and corporate governance. These companies also tend to have exhausted their private capital channels and use AIM to access public markets. Among the companies quoted on AIM are UK household brands like YouGov, Boohoo and ASOS.

The UK-based investment manager Logic Investment’s Sharia AIM Portfolio will consist of 20 to 30 AIM-listed companies. The minimum investment size is £50,000 ($67,866)). To ensure suitability, Logic will conduct a KYC (Know Your Customer) analysis of each investor to understand their investment objectives and risk appetite.

This new Sharia AIM portfolio is available via independent financial advisors or through Logic directly through their own website. The charge for the portfolio is 1.91% per annum which includes all fees spread over a five-year period.

Inheritance tax exempt portfolio

In the UK, inheritance tax (IHT) is a form of taxation on an estate (referring to a property, money and possessions) of someone who passes away. The standard rate of inheritance tax is 40% on estate with value of more than £325,000 ($441,130).

The rationale of this portfolio has been driven by lack of available Sharia-compliant funds, portfolios or options for inheritance tax and wealth management according to Darren Easton, Director at Logic Investments.

“Previous generations in Muslim communities did not consider wealth management and IHT considerations,” he said. “Muslim communities have been and are overpaying for wealth planning and for inheritance tax.”

Both Logic and Islamic Finance Guru (IFG), a UK-based Islamic finance platform, highlight that one of most attractive features of this new portfolio is that it provides a way of managing inheritance tax in a Sharia compliant manner.

“A key part is that to be IHT exempt is that investors need to hold investment for a minimum of two years,” said Easton. “Also, if held within an ISA [Individual Savings Account] the portfolio will also be exempt from capital gains and income tax.”

Ibrahim Khan, co-founder and CEO of IFG, said a tax-efficient Islamic will is helpful to mitigate some of the inheritance tax burden, and SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) venture investments are also helpful.

“[But] venture is an illiquid and higher risk asset class so you can only invest a relatively small portion of your money there,” he said. “This is where AIM portfolios come in. They are a more liquid and lower risk investment and also benefit from significant tax benefits. The crucial one is that if you hold eligible AIM shares for two years, the entire amount becomes free of inheritance tax. For the first time, affluent Muslims have access to this critical tax-planning strategy.”

Logic’s Easton stresses that despite the past performance of the AIM and the attractiveness of the tax incentives after two years, this portfolio is not for all investors.

“AIM is high risk and we make this clear to the clients with the screening as well as through our consultations and marketing,” he said. “We are marketing this product to the more sophisticated investors looking at IHT Sharia compliant alternatives.”

Sharia considerations

To ensure that portfolio remains halal, IFG will screen the portfolio every quarter.

Using AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) guidelines, IFG’s internal scholar Mufti Bilal Omarjee, will conduct the Sharia analysis.

Logic’s Easton did note there were some challenges in the structuring of the portfolio.

“It has been a challenge creating this portfolio because there are specific requirements of Sharia which make existing AIM portfolios not compliant because of the level of debt as well as the activities in non-compliant sectors,” he said. “We had to think about the model and how to manage the debt-to-equity situation.”

More products, liquidity and scale needed

Scott Levy, CEO at Bedford Row Capital, a London-based fixed income structuring firm, said that AIM investments provide some UK tax incentives although should only be available to sophisticated investors.

“AIM shares can be high risk and are an illiquid asset class and are not suitable for everyone. Investors should recognise the risks,” he said. “It's nice to give investors a choice but there are still significant needs and opportunities for Muslim retail customers in the UK, particularly at the lower end of the risk scale.”

IFG’s Khan agreed, adding that a more diverse range of products are required to meet market needs.

“Halal insurance products are still largely absent in the UK. High quality, accessible fixed-income instruments are also in low supply,” he said. “Personal and education finance as well as the various forms of SME finance are also either unmet needs or underserved needs.”

With regards to wealth management products, Easton suggested lack of scale and liquidity remain a key challenge. He said that although there are Sharia compliant funds and pensions offered by some UK asset managers and providers, the lack of liquidity and scale mean that larger providers have yet to offer or expand their offering of Islamic products or portfolios.

“It is difficult to build larger Sharia compliant portfolios of around £800 million ($1.08 billion) to £900 million ($1.22 billion) or £1 billion ($1.35 billion) due to the lack of liquidity,” he said. There is a space in the Sharia IHT and wealth management space and smaller players like Logic can fill the gap.”

Looking ahead

Logic is currently onboarding 25 clients to the Sharia AIM portfolio. Over the next four months they are hoping to sign 100 more clients, some of whom are based overseas, according to Easton.

He also revealed that Logic is exploring the introduction of more Sharia compliant portfolios and products in the near future. He declined to elaborate further on what kind of portfolios or products the investment manager is working on.

“As with any new product and portfolio, it needs to be demand driven and to also have the right scale,” he said.

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