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Inheritance Tax (IHT) is paid on the money and possessions that you leave to your beneficiaries when you die. The first £325,000 of your assets are free from IHT (this is often called the ‘nil-rate band’ - NRB), but everything over this level is taxed at 40%. The current NRB of £325,000 is expected to remain frozen until 2021. In April 2017, the Government introduced an additional IHT allowance of up to £100,000 to apply to the family home in certain circumstances. This additional allowance will increase by £25,000 each year until it reaches a maximum of £175,000 by 2020/21.
There are a number of well-established ways to reduce or potentially even eliminate the amount of IHT your loved ones are required to pay. Examples include financial gifts, trusts and making the most of investments that qualify for Business Property Relief (BPR), which is an established form of tax relief that gives people an incentive to invest their money into trading businesses. It was introduced in 1976 as a way to ensure that IHT wasn’t paid on small businesses.
The Alternative Investment Market (AIM) is the London Stock Exchange's international market for small companies.
In 2013, the Government changed the rules to allow AIM-listed shares, which can be BPR qualifying to be held in an ISA. AIM is the London Stock Exchange's international market for small companies. A wide range of businesses, including early stage, venture capital backed, as well as more established companies, join AIM seeking capital to fund growth.
The AIM market is home to many small, dynamic businesses with significant growth potential. Any profits would be tax-free in an ISA, but they can be very volatile with a high risk of failure. They should only be considered by sophisticated investors who have a long-term investment horizon, understand the risks and can accept falls in the value of their investment.
Certain AIM shares benefit from BPR which provides an IHT exemption once the shares have been held for two years. Therefore investors holding these shares in their ISA for the two-year qualifying period should benefit from virtually no taxes while they hold the share, and no potential IHT liability.
Remember you should always consider the investment merits first and look at the tax benefits as an added bonus, not a reason to invest.
The key benefits of using an AIM Inheritance Tax ISA are:
The key risks of investing in this type of ISA include:
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