How AIM could mitigate Inheritance Tax on ISAs

Sam McArthur, of Puma Investments, explains how accessing an AIM portfolio service can offer the potential growth opportunities of AIM stocks combined with the benefits of Inheritance Tax mitigation.

“The happiest mourner at a rich man’s funeral is usually Uncle Sam.” Richard Miller (clinical psychologist)

While Richard Miller was referring to across the pond, an ever-increasing number of UK estates are now subject to Inheritance Tax (IHT). In the 2017/18 tax year, IHT receipts surpassed £5bn for the first time – having increased 8% from the previous year1 – and they’re predicted to keep rising at a considerable pace. Indeed, by 2023/24, the Office for Budget Responsibility estimates that IHT receipts will have doubled in the space of a decade.

What’s behind the rise in IHT receipts?

IHT is charged at 40% on taxable estates that are valued over a threshold of £325,000 per individual. This ‘nil rate band’ has been frozen since 2009, although married couples and those in civil partnerships can combine their nil rate bands to pass on £650,000 to their heirs without incurring IHT. In 2017, the ‘residence nil rate band’ was introduced to provide an additional level of shelter. However, its practical impact is reduced by its limitations.

Against a frozen nil rate band, the key factor driving many more families into a potential IHT liability is rising asset values. According to HMRC’s latest Inheritance Tax statistics, properties, securities and cash savings make up the top three ingredients of tax-paying estates2. And with the average national house price rising by 43% over the past decade3, many homeowners will breach their nil rate band simply because of the value of their primary residence.

The appeal of ISAs

ISAs remain a popular choice for both cash savings and stocks and shares investments. In fact, HMRC’s ISA statistics for the 2017/18 tax year show that the total value of ISA holdings stood at £608bn4. However, an ongoing challenge for investors is that, while ISAs are extremely tax efficient during a holder’s lifetime, they fall within the investor’s taxable estate on death if passed to anyone other than a spouse or civil partner. If this is the case, they will be subject to IHT if the estate exceeds the nil rate band.

Can ISA IHT liabilities be mitigated?

The simple answer is yes – there is a solution to help advisers mitigate clients' potential IHT liabilities without requiring a complex structure or reducing their access to capital. This estate planning solution uses Business Relief, which was first introduced in 1976 and helps promote investment into growing UK businesses.

A range of UK private companies qualify for Business Relief, including many stocks quoted on the Alternative Investment Market (AIM). If, at the point of death, a client held an investment in a qualifying business for a minimum of two years, that investment is excluded from their taxable estate and is free from IHT.

Although the IHT exclusion applies irrespective of whether the asset is held in an ISA or an Investment Account, investors have been able to hold AIM stocks via an ISA since 2013. This means they can enjoy the IHT benefits of Business Relief whilst maintaining the traditional tax benefits of the ISA wrapper (where returns are free of both income and capital gains tax). Advisers can help clients mitigate potential IHT liabilities by allocating this year’s ISA allowance to an AIM IHT service, or by switching existing assets, assuming this meets client goals and is consistent with their risk/reward profile.

AIM IHT portfolio services

Accessing an AIM IHT portfolio service can offer investors the potential growth opportunities of a carefully-selected portfolio of AIM stocks combined with the benefits of IHT mitigation. Depending on the service, investors can choose to invest either within or outside an ISA wrapper, or through a combination of both.

Investing through a platform like FundsNetwork means advisers also retain the benefits of keeping all the client’s assets in one place. Meanwhile, the client can hold a discretionary fund manager proposition in their tax wrapper, creating a flexible approach to risk-targeted investing that delivers both specialist estate planning and tax efficient growth over their lifetime.

You can view AIM investments available on FundsNetwork by using the ‘Investment Finder’ tool once you have logged in to the platform and selected ‘Investments’ from the left-hand menu.

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Issued by Puma Investments

1Inheritance Tax Statistics 2015 to 2016
2Inheritance tax: assets by range of estate
3UK House Price Index: December 2018
4Individual Savings Account (ISA) Statistics

The value of investments can go down as well as up so your clients may not get back the amount they invest. The value of tax savings and eligibility to invest in an ISA depend on personal circumstances. All tax rules may change in future.