Many happy returns – the IHT-free ISA is three years old

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.

Three years ago, on 5 August 2013, one seemingly small change to ISA rules became effective. 

It didn’t make it to the newspapers’ front pages but it was a significant and valuable change in ISAs’ history. It meant at last investors had a choice, other than letting their portfolio be butchered by Inheritance Tax on death. 

On 5 August 2013 the IHT-free ISA was born. 

What changed?  

Investors were allowed to hold AIM stocks in their ISA for the first time. Importantly, many of these stocks are IHT free. This is because they qualify for something called Business Property Relief – BPR for short. 

So if your ISA is invested in the right (i.e. BPR-qualifying) AIM shares, it should be possible to pass it on to whomever you like without a penny due in Inheritance Tax. That’s assuming 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. 

This could be of great value to thousands of investors. 

An estimated 45,100 families will pay IHT in 2016/17 – a 35-year high. They will pour a record £4.6 billion into the government’s coffers, more than £100,000 each on average. 

How could you make your ISA IHT free?

If your provider allows, and you have the time and inclination to carry out research, you could build your own AIM portfolio within your existing ISA.  

The alternative is to opt for a ‘ready-made’ portfolio, selected and managed by a professional manager specifically to protect your ISA from Inheritance Tax. This is an increasingly popular choice for two reasons:

  1. A good manager will ensure the companies within the portfolio qualify for BPR and continue to do so. 
  2. They will have the experience and knowledge to select shares in companies they believe will do well. AIM is a market of extremes: some companies perform outstandingly, many fail. 
Read article: AIM – basket case or treasure trove of hidden gems?

Two ways to invest

If the idea of a specialist portfolio appeals, you could invest your ISA allowance (currently £15,240) in an AIM Inheritance Tax ISA. 

If you want to protect an existing ISA from IHT, the solution is simple. You could transfer part or the whole of your ISA to an AIM Inheritance Tax ISA. This means your existing investments will be liquidated and the proceeds transferred to the AIM Inheritance Tax ISA. 

By so doing, your money never leaves the ISA regime, so you will continue benefiting from the standard ISA tax benefits. In addition, after two years the investment should become IHT free. 

Please note: AIM IHT ISAs invest in small companies, which are generally more volatile and illiquid than larger companies and much higher risk. Neither your capital nor the tax savings are guaranteed. Please read carefully all the benefits and risks to decide for yourself if you should invest. Our service is not advice. If you’re unsure, please seek advice.

Photo credit: Will Clayton

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. 

Download our free report: How to make your ISA IHT-free

Learn how AIM Inheritance Tax ISAs work, and how to choose one

Download now