Time to take AIM at Inheritance Tax with your ISA?
The tax benefits of ISAs can extend to inheritance tax.
Individual Savings Accounts (ISAs) have three major tax advantages:
1. No UK income tax liability on UK dividends and interest. With frozen tax bands and allowances plus an increase in dividend tax rates for this tax year, that tax freedom is more valuable than ever.
2. No UK tax on capital gains. Relatively few people pay capital gains tax (CGT) – fewer than 300,000 in 2019/20 – but for those who do, the ISA CGT exemption not only saves tax, but also what can be complex calculations and record keeping.
3. There is nothing to report on your tax return.
One tax disadvantage sometimes attributed to ISAs is that they cannot be placed into trust or given away in lifetime, meaning at death, they potentially attract inheritance tax (IHT). At up to 40% of the entire ISA value, IHT can more than wipe out the income tax and CGT savings.
While it is true that your ISA will be part of your estate, it is possible to sidestep any IHT liability on its value. To achieve this, your ISA needs to have been invested for at least two years in shares which qualify for IHT business relief, which effectively removes them from any IHT charge. In practice, that means your ISA needs to be directly invested in shares in ‘qualifying’ companies listed on the AIM market.
The ‘qualifying’ is important: not all AIM-listed companies will meet the requirements for business relief. For example, property investment companies will not qualify, but property development companies usually will. Companies listed on foreign stock exchanges as well as AIM may also not be eligible for relief.
The need to select AIM companies and monitor their continued eligibility has encouraged investment managers to develop specific IHT AIM portfolios for ISAs (and direct investment). The market has grown as IHT liability has increased and there is now a good choice of managers, many with track records.
If you want this tax year’s ISA to save income tax, capital gains tax and inheritance tax, why not consider an AIM ISA?
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
The value of tax reliefs depends on your individual circumstances.
Tax laws can change.
The Financial Conduct Authority does not regulate tax advice.
Ancojada Limited trading as Ancojada Group is not authorised or regulated to provide financial advice.
All financial advice is provided by other regulated businesses.