It is not uncommon for individuals to accumulate sizeable ISA portfolios over the course of their lifetime.
As the ISA becomes a large asset alongside people’s homes and other accumulated savings, they become part of the overall estate subject to inheritance tax (IHT). The government provides certain allowances for IHT some of which are as follows:
- the nil-rate band of £325,000 per person
- the residence nil-rate band of up to £175,000 per person
- IHT-free pension death benefits
- IHT business relief on a business
- IHT agricultural property relief
- Annual gifts of £3,000 per annum
From an IHT point of view, an ISA portfolio could be subject to 40% tax after other allowances have been used.
Whilst many investors may not want to lose the tax benefits of an ISA, they may not want to lose 40% of the ISA value in tax when passed onto their beneficiaries.
An option to consider here is the alternative investment market (AIM) ISA.
What is an AIM ISA?
An AIM ISA invests in a portfolio of assets that have the potential to qualify for Business Relief. They are a specialist investment and the shares within the portfolio could qualify for full relief saving up to 40% IHT after holding the assets for more than two years. Investors still retain access to, and control of their ISA, whilst enhancing the existing tax benefits.
The AIM portfolio will be managed by a professional manager and, as long as the shares are held for at least two years, and provided they are still held on death then, from a legislation point of view, they remain qualifying and the portfolio should be IHT free.
AIM ISAs invest in AIM companies that qualify for business relief. AIM is a diverse index comprising about 850 companies with market capitalisations anywhere between £100,000 and £3.7 billion. AIM IHT portfolio managers tend to focus on established, larger, mature businesses. They should be more resilient and deliver growth but can be quite volatile. An investment in an AIM portfolio acquires shares in the underlying companies.
How to invest in an AIM ISA?
Contributions can be made up to the annual ISA allowance of £20,000 per individual. Furthermore, investors can transfer unlimited amounts from existing ISAs to the AIM ISA. It is possible to revert back to a traditional Stocks and Shares ISA if individual circumstances change.
Key benefits
- An AIM Inheritance Tax ISA is designed to provide full relief from IHT, instead of leaving beneficiaries with an IHT bill of 40% of the investment.
- Most forms of estate planning (such as gifts or simple trusts) take seven years to become fully exempt from IHT. An AIM IHT ISA takes just two years (but must still be held on death).
- An AIM ISA is fully accessible, with the option of one-off or regular withdrawals whenever needed. However, any monies withdrawn cannot be put back into the ISA. Plus any amounts withdrawn, if not spent, will form part the investors estate for IHT purposes.
- The tax breaks associated with the ISA will continue, with income and capital gains accrued within the ISA being tax free.
Key risks
- The value of the investment can go up or down and an investor may not get back the full amount invested. Investing in AIM-listed shares normally involves more risk than investing in shares of companies listed on the main market of the London Stock Exchange.
- The investment could experience volatility. The performance of AIM-listed shares tends to be more volatile, which means their value can rise or fall by greater amounts on a day-to-day basis.
- Any tax relief is not guaranteed. The benefit of tax relief depends on the individual circumstances of each investor. Tax rules could change in the future, and the availability of tax relief also depends on the underlying companies maintaining their qualifying status. This is assessed by HMRC at the point a claim for the relief is made.
- An investment could take longer to sell than expected. Shares in AIM companies are not as easy to buy or sell as shares listed on the main market. As such, the availability and timing of withdrawals cannot be guaranteed.
- Professional advice should be obtained in respect of any investment decisions to determine their suitability.
Disclaimer:
The information provided is for general information purposes only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
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