LATER LIFE PLANNING
USING AN AIM IHT ISA TO MAKE ISA WEALTH IHT-FREE
Karen Sullivan Head of Strategic Partnerships Puma Investments
ISAs and IHT Individual Savings Accounts ( ISAs ) remain a popular way to save and invest tax-efficiently . Yet many people are unaware that ISAs ’ tax incentives don ’ t include exemption from Inheritance Tax ( IHT ). In fact , an ISA could be subject to a 40 % IHT bill when included as part of a person ’ s taxable estate .
Understanding the additional permitted subscription Although someone who is married or in a civil partnership does not pay IHT on money or property left to them by their spouse , until recently any investments held within an ISA lost their tax benefits when transferred to the surviving spouse . However , since 2015 , a surviving spouse or civil partner is able to ‘ inherit ’ the tax benefits of their deceased partner ’ s accumulated ISAs . This is called the ‘ Additional Permitted Subscription ’ ( APS ) and means that any accumulated ISA could effectively be inherited by a surviving spouse or civil partner in the form of an increased ISA allowance for them , provided that they were living with the deceased within the meaning of section 1011 of the Income Tax Act 2007 at the date of the deceased ’ s death . Once an APS has been arranged , the surviving spouse can keep the accumulated ISAs with the same product provider or transfer them . Where an investor held ISAs with several companies , a separate APS is available for each . The APS doesn ’ t affect the surviving spouse ’ s own annual ISA allowance (£ 20,000 for the 2020 / 21 tax year ). Here we put this into context .
Estate planning through an inherited ISA Susan and David were married with two adult children before David ’ s death . David ’ s entire estate was left to Susan – including the family home ( valued at £ 1 million ) and his ISA investments . David opened his first ISA back in 1999 and had accumulated
ISAs valued at £ 200,000 . David hadn ’ t written a will , so his entire estate – including the family home and his Stocks & Shares ISA ( valued at £ 200,000 ) – went to Susan . Susan needs to start planning for her own estate for the family wealth to be passed on to her children . Susan ’ s financial adviser explains that now the house is in her name , as the surviving spouse she can leave it to her children , making use of the combined nilrate band for couples and also transfer the unused Residence Nil-Rate Band ( RNRB ) inherited from David . However , the adviser also informs Susan that as things stand , her husband ’ s accumulated Stocks & Shares ISAs will be subject to IHT . Without any available allowances left to claim , a 40 % charge on the accumulated ISAs would leave an IHT bill of £ 80,000 . Split equally between her two children , this would leave them with an ISA inheritance of just £ 60,000 each .
Transferring inherited ISA wealth into an AIM ISA for estate planning Susan ’ s adviser explains that with careful estate planning , Susan ’ s ISAs could achieve full IHT exemption , so both children inherit the full £ 100,0000 . He explains the benefits of using the APS and gives her the information she needs to contact David ’ s ISA providers and confirm the amount available to transfer . After assessing Susan ’ s own investment objectives , her attitude towards risk , her capacity for loss and her personal circumstances , her financial adviser recommends an AIM IHT ISA . The adviser points out that as well as making a one-off investment that matches the value of David ’ s accumulated ISAs , she can also make new investments into the same ISA , up to the annual allowance of £ 20,000 . Susan could also transfer any ISAs held in her own name if desired . Once Susan has held the AIM IHT ISA for at least two years , the Business Relief
( BR ) -qualifying shares can be passed to her children free from IHT provided she still holds these on death .
Understanding the investment risks Susan ’ s financial adviser explained the risks and charges associated with this investment ; that a new AIM IHT ISA will invest in shares of AIM-listed companies , the shares of which are more volatile and carry more risk than shares listed on the main market of the London Stock Exchange ; and that AIM-listed shares may be harder to sell . He also reminded Susan that an ISA should be considered a long-term investment . Its value can go down as well as up , and the investor or their beneficiaries may not receive the full amount invested . Because this ISA is intended for tax planning purposes , the adviser told Susan that tax rules can change , and that tax reliefs are subject to personal circumstances . HMRC will only assess whether the individual investments within the AIM ISA qualify for BR after death and claiming BR will depend on whether each company qualifies at that time . P
If you ’ d like to hear more about AIM ISAs , please get in touch on 020 7408 4070 or advisersupport @ pumainvestments . co . uk .
The case study scenario is for illustrative purposes only and assumes no gains or losses on investments . The advisor will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted , and the impact of charges , as relevant to the offering ( s ) represented and / or any specific offer chosen . Tax reliefs depend on the individual investor ’ s circumstances and may be subject to change . This is for financial professionals only and not to be read as tax advice .
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