Inheritance tax – Investors who want an inheritance tax-efficient ISA

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

This article is adapted from Octopus Investments' publication "Identifying clients who could benefit from BPR-qualifying investments" and it is reproduced with its permission. Read more about Octopus Investments

The article has been written in accordance with Octopus Investments’ understanding of the law and interpretation of it at the time of publication: remember tax rules can change and benefits depend on circumstances.

Important:The example scenario that follows is for illustration purposes only and assumes that the nil-rate band is offset against other assets. It is important to note that the risk profile of each portfolio, and any investment growth or losses, is likely to differ. The tax benefits of the BPR portfolios could mitigate the additional risks investors are taking with their money. The scenario assumes the costs for each portfolio are the same, but actual costs may be different.

Peter is a committed ISA investor

ISAs come with attractive tax benefits during someone’s lifetime, but are subject to inheritance tax along with the rest of a person’s estate when they pass away.

As of 2013 though, investors can hold shares in AIM-listed companies that are expected to qualify for BPR within an ISA.

Peter is a committed ISA investor. But like thousands of people across the UK, he is concerned about inheritance tax. Peter is 70 years old and has never married. His house alone is worth more than £500,000 and he expects that his daughter Emma will have to pay 40% inheritance tax on his investments when he dies. This includes the ISA investments he’s been building up over the years.

He’d like to find a way to invest that retains the tax benefits of an ISA wrapper, without the inheritance tax liabilities.

How a BPR-qualifying investment can help

Peter could consider investing in a BPR-qualifying investment held within an ISA. It comes with the same tax benefits his ISAs have always enjoyed, but after two years the ISA becomes free from inheritance tax, assuming it is still held at the time of death.

It also offers access to the growth potential of carefully selected UK smaller companies. Peter’s money will be invested in a selection of companies listed on the Alternative Investment Market. Certain AIM-listed companies qualify for BPR, and after holding the ISA for two years the investment should become free from inheritance tax.

The estate planning benefits of this ISA may make it particularly interesting for investors considering ISA transfers, especially older investors who have large estates, and have built up significant ISA portfolios.

Many forms of inheritance tax planning put money permanently out of an investor’s reach. This lack of access can make it more difficult to deal with any unexpected costs that come up in later life. However, with a BPR-qualifying investment held within an ISA, the investment is still held in the investor's name, and they can access their investment when they need to.

Key investment risks

  • The value of a BPR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
  • Tax treatment depends on individual circumstances and could change in the future.
  • Tax relief depends on portfolio companies maintaining their BPR-qualifying status.
  • The shares of unlisted or smaller companies (including AIM-quoted shares) could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
  • BPR-qualifying investments are not suitable for everyone. Neither Wealth Club nor Octopus Investments offer investment or tax advice or personal recommendations. If you are unsure an investment is right for you, please seek specialist advice. 

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Important: The information on this website is for experienced investors. This is a very short summary of a complex subject. It is not advice nor a personal recommendation. This article is intended solely to provide basic information – neither Octopus Investments nor Wealth Club offer investment or tax advice. If you are unsure, please seek specialist advice. Investments that qualify for inheritance tax relief place your capital at risk, and the value of the investment can fall or rise.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 

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