New tax year: make this year's ISA IHT free
With the new tax year comes a new £20,000 ISA allowance – and an opportunity for experienced investors to start to protect ISA money from tax even after they die.
Why consider an AIM Inheritance Tax ISA?
Contrary to what many think, ISAs are not free of IHT, so could be subject to a 40% tax charge on death.
An AIM Inheritance Tax ISA could offer experienced investors, prepared to take more risk, a solution. You could make a new subscription (up to the current ISA allowance of £20,000) or transfer unlimited amounts.
When you invest, you could retain the ISA benefits of tax-free growth and income. In addition, after two years your ISA should also become IHT free. Importantly, unlike other forms of estate planning, you don’t lose access to your money. Please note, tax rules can change and benefits depend on circumstances. AIM shares are more illiquid than those on the main stock market and, as the current global COVID-19 situation has demonstrated, can move up and down quite suddenly, so capital is at risk.
If you plan to use your new ISA allowance for this tax year, and are happy with the higher risks of AIM, you could consider an AIM IT ISA.
Current AIM Inheritance Tax ISA offers for new ISA subscriptions
One thing to bear in mind is that the minimum investment for some offers is higher than the current ISA allowance of £20,000. This means that to make a subscription this tax year, you also need to transfer previous ISAs (unless you're topping up an existing ISA).
There are, however, three offers that accept new subscriptions of £20,000: the Octopus AIM IHT ISA, Downing AIM Estate Planning Service ISA and Puma AIM IHT ISA. You can read more about these below or see all AIM ISAs, including offers with a higher minimum investment.
Our choiceOctopus AIM IHT ISA
The Octopus AIM IHT ISA is the largest service of its kind (it manages over £1.8 billion). It is managed by a highly experienced team, including professionals who have been investing in AIM since the market was created in 1995. The offer aims to invest in established and profitable businesses, which the manager believes can deliver growth as well as IHT relief.
When you invest through Wealth Club, you benefit from a 25% discount on the initial charge, compared with going direct.
Downing AIM Estate Planning Service ISA
The Downing AIM IHT ISA portfolio aims to make long-term investments into smaller, often unloved, AIM-quoted businesses available at an attractive valuation. The £73.8 million AIM IHT portfolio is run by the Downing public equity team, which manages a total of £328 million (as at 31 December 2020) across a range of investment funds, all broadly following the same investment philosophy.
Puma AIM IHT ISA
This AIM IHT service is managed by Puma Investments, part of Shore Capital, one of the largest AIM market makers. It is a discretionary investment portfolio of around 20-25 companies screened across three key metrics: quality, growth and value. Currently, the average market capitalisation of companies in the portfolio is £508 million (December 2020). Companies are typically bought with a three to five-year time horizon.
ISAs and IHT at a glance
ISAs lose their tax-efficient status on death. This means the beneficiary will not benefit from tax-free income and growth and might have to declare them in their tax return. In addition, ISAs can form part of your estate. If your estate is liable for inheritance tax, your ISA will be caught too.
There are, however, two exceptions.
1. It is effectively possible to pass on an ISA to a spouse or civil partner
On your death, your spouse has a one-off chance to invest that amount in their own ISA, in addition to their standard allowance for that year. However, that only defers the IHT problem. On your spouse’s death, the ISA would form part of their estate and potentially be subject to IHT then. In other words, whilst the tax benefits on income and growth are preserved, the IHT problem is postponed rather than solved.
2. You can invest in certain AIM stocks that benefit from IHT relief through your ISA
Many companies quoted on AIM can qualify for something called Business Property Relief, BPR in short. If your ISA is invested in BPR-qualifying AIM stocks you should be able to pass it on to your loved ones without them having to worry about IHT. That’s provided you hold the shares for at least two years and still hold them on your death.
So you could enjoy tax-free growth and income during your life with the peace of mind no inheritance tax should be due on your death. Tax rules can change and benefits depend on individual circumstances.
AIM shares are for experienced investors and should be considered only as part of a wider portfolio. They are more volatile, less liquid and generally seen as higher risk than more mainstream investments: you could get back less than you invest. You could lose the entire amount invested.
This is a brief summary of a very complex subject. If you're at all unsure, you should seek professional advice.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.