Don't Fall In To The ISA Inheritance Tax Trap
The tax efficient benefits of saving through an ISA are widely known. Introduced in 1999, today the ISA is seen as a cornerstone to savings and investments. Many people have amassed a significant savings pot, which of course is tax-free.
However, the tax benefits only apply during the holder’s lifetime, meaning the funds will form part of their taxable estate for the purposes of inheritance tax (IHT).
Perhaps it is not until later in life that you may start to consider whether the tax benefits of an ISA extend to IHT, only to find unfortunately they do not – potentially leaving you with a different issue.
There is an ISA available which can reduce or negate IHT. An AIM ISA portfolio or AIM IHT ISA portfolio consists of AIM-listed shares that should benefit from IHT relief, in addition to tax free growth and income.
The portfolios invest in AIM-listed companies that qualify for something called Business Property Relief (BPR). Shares held in AIM companies for at least two years potentially qualify for BPR, which if still held on death should not be liable for IHT. One of the main benefits of these ISAs is the speed at which the investments become IHT-free compared to other options (you may have heard of the seven year rule) meaning you can potentially pass more of your wealth on to your loved ones.
It is possible to transfer a portion or your entire ISA ‘pot’ to an AIM ISA, depending on your estate planning needs. The same tax benefits apply, tax-free income and growth whist retaining access to the money with full control.
There are risks associated with these ISAs, so they may not be suitable for everyone. Your capital may be at risk. However, if you have inheritance tax concerns, it could be enormously beneficial to explore the options to ensure you don’t fall into the ISA inheritance tax trap.
To discuss how we can help with your estate planning, book your complimentary financial planning review with one of our advisers, call 0117 3636 212 or email office@haroldstephens.co.uk.