How to use an ISA for Inheritance Tax Planning

Inheritance Tax

Your client has been very diligent financially, they have paid off their mortgaged, managed to put away money into pensions and investments but are concerned about the potential inheritance tax (IHT) that their children will have to pay on their death.

Many people in this situation will have used ISAs to build up capital and like the tax efficiency that this type of investment provides. Many people do not appreciate that although ISAs are a great way to grow money ultimately they do create an IHT problem.

Many people are also concerned about giving money away, if we had a crystal ball and knew when we were going to die and what was going to happen along the way, it would be so much easier. They worry that capital may be needed if they have a painful medical issue that is not deemed an emergency, they would prefer not to wait and want to have the money available for this. They may also worry that they could need capital to have a greater choice of care facility if they need to have residential or nursing home care.

Often clients leave it until they are ill or quite elderly to consider IHT mitigation if they haven’t been prompted previously to look at the options.

There is a scheme that will provide for all of the above an AIM IHT ISA.

An AIM IHT ISA is designed to provide the client with inheritance tax exemption on the value of their investment after just two years. It allows them to stay in control of the invested capital, whilst also offering the potential for attractive investment returns.

They can choose to make withdrawals in order to provide cash flow during their lifetime. Alternatively, the investment can be held until death, maximising the potential for growth. Importantly, while the investment remains within an ISA wrapper, it retains all the lifetime tax advantages that an ISA provides, while becoming free from inheritance tax after two years.

Example:

William retired in his late 70s, he lives comfortably on his pension income. He has a property valued at £895,000 and has built up a Stocks and Shares ISA portfolio of £210,000 over the last 20 years. He would now like to find a way to invest that retains the benefits of an ISA wrapper with the potential IHT liabilities.

  • William transfers his existing ISA into an AIM IHT ISA in March 2018
  • Any non-Business Relief (BR) qualifying shares are sold (within the ISA wrapper gains are not subject to Capital Gains Tax)
  • The manager of the AIM IHT ISA invests into suitable AIM BR shares
  • After 2 years the investment portfolio will obtain 100% IHT relief
  • William will maintain access to the funds during his life and benefit from growth potential from a carefully selected portfolio of shares

 

If William were to die on 15 June 2020

 

Without Planning
With Planning
House
895,000
895,000
Stocks & Shares ISA
210,000
0
AIM IHT ISA
0
210,000
Total Assets
1,105,000
1,105,000
Nil Rate Band
650,000
650,000
Residence Nil Rate Band
350,000
350,000
Balance liable to IHT
105,000
0
IHT payable @ 40%
42,000
0

 

William has his wife’s inheritance tax allowances available as everything passed to him on her death. I have assumed that the standard nil rate band has not increased from the current £325,000.

As AIM IHT ISA has been in existence for more than 2 years William’s investment receives business relief and passes to his children free of IHT.

William’s children will benefit from the whole of the estate value rather than having to pay IHT liabilities of £42,000.

 

 

If you have any questions or queries on this topic, please feel free to leave a comment or contact us here.

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