Tax savings

IHT relief on AIM ISAs – a potential saving of 40%

If you hold any ISAs, on your death they will form part of your estate. The first £325,000 (£650,000 for married couples) of your estate is currently inheritance tax free.  Added to that, many people will have a new allowance in the form of the residence nil rate band, which starts at £100,000 from 6 April. However anything above both allowances will be taxed at 40%. So if you have accumulated large sums in ISAs over the years you could be caught. 

An AIM Inheritance Tax ISA portfolio could be a solution. 

It’s the only way to protect your ISA from IHT whilst keeping all the ISA benefits. 

How AIM ISAs qualify for IHT relief

IHT-free ISAs are possible since August 2013 when new rules were introduced to allow you to hold AIM shares in your Stocks & Shares ISA. 

Many companies listed on AIM can qualify for something called Business Property Relief, BPR in short. This was originally designed to allow family businesses to be passed on through the generations IHT free but is also available for other investments. So now many AIM and unquoted businesses enjoy that perk. 

This means if your ISA is invested in qualifying AIM stocks you should be able to pass it on to your loved ones without them paying a penny in IHT. That’s provided you hold the shares for at least two years and still hold them on your death.

When you invest in an AIM Inheritance Tax ISA portfolio you benefit from:

  • No capital gains tax on any growth
  • No further UK income tax on any dividends or withdrawals
  • Potentially no IHT when you die

How does the AIM Inheritance Tax ISA work in practice?

Consider Charles, 67, a retired lawyer, who is divorced (for the sake of simplicity in the figures below). When he sold his London home, seven years ago, he gifted the proceeds to his children. He’s now left with a cottage worth £500,000 and a Stocks & Shares ISA worth in the region of £250,000. 

If he does nothing, his estate could face an Inheritance Tax bill of £100,000. If he transfers his ISA to an AIM Inheritance Tax ISA the potential IHT bill could drop to zero, assuming the value of his estate and tax rules stay the same. 

Scenario 1 – Charles does nothing

House
£500,000
ISA
£250,000
Total estate
£750,000
Less nil-rate band
£325,000
Less residence nil rate band (2020/21)
£175,000
Taxable estate
£250,000
IHT at 40%
£100,000
Residual estate
£650,000

Scenario 2 – Charles transfers his ISA to an AIM Inheritance Tax ISA portfolio

House
£500,000
AIM Inheritance Tax ISA (IHT free)
£250,000
Total estate
£500,000
Less nil-rate band
£325,000
Less residence nil rate band (2020/21)
£175,000
Taxable estate
£0
IHT at 40%
£0
Saving
£100,000

Do AIM VCTs also qualify for IHT relief?

AIM Venture Capital Trusts do not qualify for IHT relief, even though their underlying holdings might. This is because when you invest in a VCT, you acquire shares in the trust (the VCT company), not in its underlying holdings. Only when you invest directly in a company that qualifies for BPR could your investment be IHT free.