Can my clients save Inheritance Tax through their ISA?

Barry Lynas



The simple answer is Yes – This may not be news to advisers but surprisingly few clients are aware.

The Treasury introduced new ISA rules on 5th August 2013 to allow investors to hold shares in small companies listed on the Alternative Investment Market (AIM). Many AIM shares qualify for Business Relief, which attracts 100% Inheritance Tax (IHT) relief if they have been held for at least two years and held at the time of death.

This change applies to both the current ISA allowance but crucially to any accumulated ISA funds that can be part or wholly transferred to qualifying AIM stocks.

According to HM Revenue & Customs* (Aug 2016), there are 21.7 million adult ISA holders in the UK today, holding £518 billion.

YOUR CLIENT AND COUNTRY NEED YOU!

Business Relief (BR) is a tax relief introduced in 1976 by the government as an incentive for investing in small and growing trading businesses.

It can be difficult to tell whether companies qualify for BR and whether they do or don’t can change at the drop of a hat. As a result, DIY investors holding individual shares risk being caught out. This is why many people decide to pay a manager to do it for them.

The AIM fund managers work by making sure every share picked qualifies for BR, as it can be difficult for ordinary investors to decipher.

In addition to delivering multiple tax benefits, AIM IHT ISA provides investors with exposure to some of the UK’s most exciting smaller companies. AIM is home to approximately 1000 hugely diverse companies, many of which have the potential to deliver significant long term growth. The London Stock Exchange valued the AIM market at £86 billion in February 2017**. Household names that have floated on AIM include; ASOS, Dominos, FeverTree Drinks, Majestic Wine, YouGov and fashion retailer Joules to name a few.

NOW LET’S MEET OUR MARRIED COUPLE, JERRY & SARAH

Their home is worth approximately £750,000, his pension pot £1 million and they have built up £850,000 in other savings and investments.

But, in common with many of their generation, they also have to juggle several competing concerns as Jerry enters retirement. In addition to the help they want to give their children and grandchildren, they may one day need to pay long-term care costs.

“I know I won’t escape IHT completely, but I want to minimise what I pay the state”

All too common – “I’ve thought a lot about how to take income in retirement and how best to pass on money when I die. I want to keep control over most of it in case we face large costs in the future.”

Jerry has paid in the maximum allowed into his pension and this money can be passed on without incurring IHT. He will use the pension freedoms to take some income but also wishes to live from ISA investments as well.

WHAT ABOUT REDUCING THEIR IHT BILL?

Jerry has made use of his ISA tax breaks and is open to the idea of diversifying his portfolio and reducing their IHT liability by transferring to an AIM portfolio. Some providers such as Blackfinch Investments offer the choice of Income and/or Growth based portfolios with targeted dividend yields of 4% and 2% respectively.

Faced with losing 40% to the taxman and taking a risk, Jerry is happy to try the latter.

OTHER USEFUL BENEFITS AND CONSIDERATIONS

  • Traditional estate-planning tools, such as gifts and trusts, are not a suitable option for many people because they involve giving the assets away. Estate planning through an ISA can deliver several other benefits to investors including
  • Retaining access to their investment, allowing them to build capital value free from lifetime taxes
  • Ability to take a regular income
  • Able to dispose of their holding if their circumstances change
  • The ability to transfer share ownership between spouses, following the death of the first spouse, without ‘resetting the clock’ on the two-year BR qualification period.
  • For those older clients, willing to accept additional risk by transferring from cash into a stocks and shares ISA, they may well want to consider transferring into one that offers IHT exemption as well. After all, choosing to do nothing could prove to be a very frustrating and fruitless experience.

As with any stocks and shares ISA, capital is at risk and investors may not get back the amount invested. In addition, companies listed on AIM normally involve more risk than those listed on the main London Stock Exchange.

BLACKFINCH SOLUTION

Blackfinch work in partnership with smaller market cap company specialists Chelverton Asset Management to offer investors genuine portfolio diversification when investing in our Adapt AIM Portfolios, not just at operator level but also at investee company / stock level.

The Adapt AIM Portfolios require a minimum of £15,000 investment and ISA transfers can be made via Standard Life and Transact Platforms.

CAPITAL AT RISK

SOURCES:

* HM Revenue & Customs ISA Statistics August 2016
** London Stock Exchange AIM Statistics February 2017

If you would like to find out further information about the range of Adapt AIM Portfolios, please call 01684 571 255 or email enquiries@blackfinch.com

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