Today: the birthday of IHT-free ISAs
Six years ago today a seemingly minor ISA rule change created a solution to one of the most vexing problems wealthy ISA investors face.
That problem is: how do you prevent your ISA being clobbered by tax when you die?
ISAs – so tax efficient in many other ways – could be subject to Inheritance Tax (IHT) when you or your spouse dies. Until recently, the options were limited and unattractive to many. They could either keep the ISA and let it potentially fall prey to IHT at 40%, or they could give up the ISA tax benefits, take the cash and give it away or put it in trust.
On 5 August 2013 a new option became possible. A change to ISA rules meant you can now hold AIM shares in your ISA. Many AIM shares qualify for something called Business Property Relief (BPR in short). If you hold BPR-qualifying shares for two years and still hold them on death, the investment could become IHT free. Remember, tax rules can change and benefits depend on circumstances.
An increasing number of investors are taking advantage of this rule change by investing – or transferring existing ISAs – into an AIM ISA: a portfolio of AIM shares specifically created and expertly managed that aims to deliver some growth and IHT relief.
Important: AIM ISA should only be considered by experienced ISA investors likely to be affected by inheritance tax. AIM-listed shares are high risk and volatile. You should not invest money you cannot afford to lose.
What might an AIM ISA look like?
The rules that govern AIM ISAs are the same as those that apply to conventional Stocks & Shares ISAs:
- You have the same allowance – £20,000 this year (but you can transfer in unlimited amounts)
- Once invested, your money can grow free of capital gains tax and any income is tax free
- You decide whether to take an income or let any growth accumulate
- You are in control of your money: you can make withdrawals or take the whole pot in cash if you need
- Your portfolio value moves up and down in line with the stocks and shares it holds
There are two main differences.
First, unlike a conventional Stocks & Shares ISA your AIM ISA should be IHT free after two years.
Second, your money is invested in AIM shares, which are considerably riskier and are less easy to sell than those listed on the main stock market.
That said, an experienced fund manager will try to mitigate that by selecting stocks they believe can deliver some growth without too many ups and downs.
Remember, capital is at risk and investors should not invest money they cannot afford to lose.
Under current rules, BPR-qualifying AIM investments held for at least two years and on death are IHT free but please remember tax rules can change. HMRC will only assess if assets qualify for BPR on death.
How could I invest in an IHT-free ISA?
If you have the time and inclination, you could research and select AIM-listed shares that qualify for BPR and build a portfolio yourself.
Alternatively, there are reputable and experienced asset managers that offer ready-made portfolios. One of our favourites is the Blankstone Sington AIM ISA.
Blankstone Sington AIM ISA
Launched in 2010, this is a relatively small and arguably nimble portfolio, with a distinctive investment strategy.
The manager focuses on smaller companies and places greater emphasis on value investing, targeting firms worth £150 million or less. These companies tend to receive little analyst coverage and are likely to be ignored by large fund groups, usually until they get bigger.
It is keenly priced. Unusually for an AIM IHT portfolio, there is no initial charge and the annual management charge is comparatively low at 1.25% or less – see full details on charges.
The portfolio track record is strong, but past performance is not a guide to the future. Annual performance is shown below.
The minimum investment is £40,000, so to subscribe for this year’s allowance you will need to transfer an existing ISA as well.
Source: Blankstone Sington. Past performance is not a guide to the future. Dividends are not guaranteed. Chart shows cumulative performance to 30 June 2019. Based on a weighted average. The performance of individual discretionary managed portfolios may vary.
Important – Treasury review
The previous Chancellor asked the Office for Tax Simplification to review a range of aspects of IHT, including BPR. A report has been published in July 2019. It is as yet unknown when and if any of the recommendations will lead to a change in rules. Currently, investments qualifying for Business Property Relief should be free from IHT after two years. Please remember, tax rules can and do change and benefits depend on circumstances.
Should I be concerned about IHT? Rules at a glance
IHT could apply to your estate if it is over a set threshold: the basic nil-rate band plus potentially the residence nil-rate band.
The basic nil-rate band is currently £325,000 for a single person (£650,000 for married couples). Any excess could be subject to IHT of 40%.
Since 2017 there is an additional provision, the ‘residence nil-rate band’. It’s currently £150,000 and will increase to £175,000 on 6 April 2020. It was introduced to help people pass on their family homes more tax efficiently.
So, single homeowners could currently pass on up to £475,000 (£900,000 for married couples) free of IHT.
There is an important caveat.
Whilst the nil-rate band applies to nearly everyone, the residence nil-rate band comes with a lot of conditions attached and may not be available – or available in full – to everyone. The rules are complex. In a nutshell, to benefit you must be a homeowner, and have direct descendants, such as children or grandchildren. Moreover, to benefit in full your total estate must be worth less than £2 million.
Please note, tax rules can change and benefits depend on circumstances.
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.
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