ISA Investing – What About IHT?

Dominique Butters



The end of the tax year is nigh…do you still have clients yet to invest in their ISA this year or are you thinking about 6th April and the new tax year’s subscription? Do your clients currently have an Inheritance Tax (IHT) liability or will they in the future? Have you thought about investing your client’s money into an AIM ISA instead? This could mean a triple whammy for clients:

  1. Smaller company exposure – not many clients have smaller company investments in their portfolio and yet smaller companies can provide a great long term investment. If clients do hold smaller companies already then it is likely to be best held in an ISA as there is potentially a greater likelihood of substantial capital growth over the longer term and therefore would make the most of the tax-free nature of an ISA.
  2. Although smaller companies are higher than average risk investments as part of an overall portfolio they can aid diversification.
  3. Clients would be building up investments which receive 100% IHT relief in just two years (and held at the time of death) as they qualify for Business Relief (BR).

You may, however, have clients that do not currently have an IHT liability but will they in the future? If they like the thought of smaller company investing this could be potentially ideal for them as they would be building up a pot of money which has the perfect combination:

  • Tax free growth
  • Tax free income
  • AND NO IHT!

This is often the one downside to an ISA…clients spend years investing and building up their ISA portfolio only to realise later on, as they get older, that although it is benefiting from tax free growth and income they are likely to lose 40% of the capital in IHT…how annoying! Of course, it isn’t too late for these clients as they could choose to do an ISA transfer into an AIM portfolio. This retains the tax benefits and once again, when they have held it for two years and at the time of death, then it would also benefit from 100% IHT relief through BR.

 

CAPITAL AT RISK

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