Essential facts

When do I have to pay Inheritance Tax?

IHT is payable at a flat rate of 40% if your estate - the money, investments or assets you own minus any liabilities, is worth more than the nil rate band. 

£325,000 is the current threshold or ‘nil-rate band’. Everyone is entitled to it. Married couples or civil partners can effectively combine their nil-rate bands and potentially pass on up to £650,000 IHT free.

In addition, from April 2017 it will be possible to pass on even more IHT free, by virtue of the new ‘main residence nil-rate band’.

What is the new ‘main residence nil-rate band’?

It’s a new nil-rate band in addition to the existing one. It applies to your interest in a residential property. 

It will start at £100,000 per person in 2017-2018 and increase by £25,000 a year until it reaches £175,000 per person in the 2020-21 tax year. After that it will increase in line with the Consumer Price Index.

This means that in 2020-21 a single person could have a total IHT-free allowance of £500,000 (£325,000 nil-rate band, plus £175,000 main residence nil-rate band). This could double to £1 million for married couples and civil partners. 

There are some restrictions, though. Here are the main ones, in brief: 

  1. The new ‘main residence nil-rate band’ will only apply to one property which has been at some point your ‘residence’
  2. It will only apply if you pass the property or the proceeds from it on to ‘direct descendants’: your children and their children.
  3. It will be tapered for estates worth more than £2 million from 2020/21. For every £2 your estate is over £2 million (after deducting liabilities but before reliefs and exemptions), the main residence nil-rate band will decrease by £1. That means that at £2,350,000 your main residence nil-rate band will be zero.

So, despite the reform, it is estimated IHT will still affect 6% of estates. 

Download our free guide to Inheritance Tax to see more details

What happens to my ISA when I die?

Whilst growth and income received within an ISA are tax free during your lifetime, ISAs form part of your estate when you die.

Since April 2015 rules are slightly more favourable. When you die, your spouse or civil partner receives a one-off additional allowance for the value of your ISA, so they can make a one-off subscription to their ISA and keep sheltering those assets from income and capital gains tax. On their death, though, the ISA would be part of their estate and potentially subject to IHT. 

An alternative is to liquidate the ISA and either put the proceeds in trust or give them away. This, however, would mean the money is no longer yours – you cannot tap into it should you need. It also means you can no longer enjoy the ISA benefits of tax-free income and growth. In addition, the assets would normally be completely IHT free only after seven years, provided you’re still alive then. 

Another and increasingly popular alternative is to invest in an AIM Inheritance Tax ISA. This would allow you to retain control of your assets, keep enjoying the ISA tax benefits and be able to pass it on IHT free. That’s provided you hold the portfolio for at least two years and you still hold it on your death. 

Why are AIM Inheritance Tax ISA Portfolios IHT free?

AIM Inheritance Tax ISAs are portfolios of AIM shares specifically selected because they should qualify for Business property relief (BPR). 

This relief was originally introduced to allow entrepreneurs to pass their small business down through generations without incurring an IHT liability. 

The scope of BPR is now wider, so it is possible to benefit even if you’re not the business owner, but simply an investor in a BPR-qualifying company, such as many – but not all – AIM companies. 

What are the tax breaks?

You can benefit from tax-free growth and income during your life and full IHT relief – a saving of 40% - on your death. 

To benefit you must hold the investment for at least two years and still hold it on your death. In addition, the companies in which you invest must still qualify for BPR at the time of your death. 

Read more about AIM Inheritance Tax ISA portfolios tax savings

Where do AIM Inheritance Tax ISA Portfolios invest?

They invest in AIM companies the manager believes will qualify for BPR. The actual portfolio will be different depending on the provider. Generally, portfolio managers tend to prefer large, established companies, which are already profitable and cash generative. 

You can see examples of portfolio companies for some of the main providers in this article.  

How much can I invest?

If you’re making a new investment, you can subscribe up to the current ISA allowance (£15,240 in 2016/17, £20,000 in 2017/18). 

If you’re transferring an existing Cash or Stocks & Shares ISA there are no limits. You could transfer the whole ISA or just a portion of it. You just need to indicate your wishes on the application form. 

Can I take an income or make withdrawals?

Because your investments are held in an ISA wrapper, they are in your name and you have the same access you would have in a standard Stocks & Shares ISA.

This means you should keep them for the long term but can make partial or full withdrawals if you need. Some providers also offer a regular income option. 

Though of course the amount you withdraw will no longer be IHT free, it will lose its ISA benefits and the value of your ISA will depend on performance. Also, AIM shares are less liquid than ordinary shares so it will usually take longer to sell.

How does the transfer work?

Once you complete and return the application form, your new chosen provider will request your funds from your existing provider. The timings will vary, but it normally takes around two to four weeks for the funds to be released. The new provider will receive them as cash and will start investing them. You may not be fully invested straightaway but you will normally be within four weeks. 

This means you will be out of the market for a period, so will not be affected by any ups or downs. 

Please remember your ISA should become IHT free after two years from when it’s fully invested.  Tax rules can change.

One last essential point. 

If you want to transfer, you must follow the transfer process set by the new provider. This normally just involves completing the relevant section of the application form. Should you request the funds from your existing ISA yourself and send in a cheque instead, your subscription to the AIM Inheritance Tax ISA would be treated as a new investment rather than a transfer, so restricted by the current ISA allowance.

What are the charges?

The charges vary by product, and often include an initial charge as well as annual management fees. 

Who are AIM Inheritance Tax ISA portfolios for?

They are for ISA investors whose estates are large enough to be affected by inheritance tax and who want to keep control of their assets. The type of portfolio chosen depends on many factors, including attitude to risk and whether income is needed. If in doubt, always seek professional advice.

What are the key risks?

AIM ISAs aren’t for everyone. They may be less diversified, less liquid and more volatile than your current ISA, and you could get back less than you invest. 

Tax savings are not guaranteed and tax rules can change. You only get IHT relief if you're invested in qualifying stocks for two years and at the time of your death. This may not always be the case, e.g. if the manager is switching investments at the time. 

If you're not sure an AIM ISA is for you, please seek advice. 

Before investing you should read carefully Wealth Club’s Risks & Commitments and your chosen product’s specific risks. These are normally included in the product documents available to download on this website.

What happens to my AIM Inheritance Tax ISA when I die?

On your death, your heirs can decide what to do with the portfolio: keep it invested, liquidate it or use it to pay any IHT due on the rest of your estate.

The AIM Inheritance Tax ISA provider will usually facilitate the claiming process: your heirs should receive a form to complete and send to HMRC.