25th July 2018

Protecting your investments using an AIM Inheritance Tax ISA

Most investors value the tax-free growth and income provided by their ISAs, but many are not aware of the Inheritance Tax (IHT) their families will have to pay on these investments when they die.

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.

Reducing your IHT bill

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 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.

Key benefits of an AIM Inheritance tax ISA

The key benefits of using an AIM Inheritance Tax ISA are:

  • Most ISAs form part of your estate when you die. An AIM Inheritance Tax ISA is designed to give you full relief from IHT, instead of leaving your beneficiaries with an IHT bill of 40% of the investment .
  • Most forms of estate planning (such as gifts or simple trusts) take seven years to become fully exempt from IHT. An AIM IHT ISA takes just two (although you must be still holding the investments when you die).
  • No complex legal structures, no underwriting and no medical questionnaires to complete.
  • Access withdrawals whenever you want. There’s an option to set up regular withdrawals if you ever need to supplement your income. Although, remember, that if you have already used your ISA allowance for the current tax year, you won’t be able to put any money you withdraw back into your ISA, and any amounts you withdraw, if they’re not spent, will form part of your estate for IHT purposes.
  • Potential for tax-free growth and dividends – as you’ll be investing in an ISA, you’ll pay no income tax on the dividends paid by the companies in your portfolio. You’ll also pay no Capital Gains Tax (CGT) on your returns and you do not have to declare ISAs on your tax return.

Risks of an AIM Inheritance Tax ISA

The key risks of investing in this type of ISA include:

  • The value of your investment can go up or down and you may not get back the full amount invested. Investing in AIM-listed shares normally involves more risk than investing in shares of companies listed on the main market of the London Stock Exchange.
  • Your investment could experience volatility. The performance of AIM-listed shares tends to be more volatile, which means their value can rise or fall by greater amounts on a day-to-day basis.
  • Tax relief cannot be guaranteed. The benefit of tax relief depends on the individual circumstances of each investor. Tax rules could change in future, and the availability of tax relief also depends on the companies we invest in maintaining their qualifying status, which is assessed at the point a claim for the relief is made.
  • Your investment could take longer to sell than expected. Shares in AIM companies are not as easy to buy or sell as shares listed on the main market of the London Stock Exchange. This means that the availability and timing of withdrawals cannot be guaranteed.
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