For professional advisers and paraplanners only. Not to be relied upon by retail investors.
An older client has diligently invested in their Stocks and Shares ISA for years, building a significant pot of wealth in the process.
From the client’s perspective, they don’t want to contemplate taking wealth out of their ISA. They’ve spent decades putting that money aside. So even when it becomes highly unlikely the ISA will be required to cover their needs during the rest of their life, the client has reservations.
That can leave the ISA facing a 40% inheritance tax bill when they die – something clients often don’t realise.
So here’s a way you can help a client to plan for their estate while leaving their ISA pot within the ISA wrapper.
Barry wants to keep his ISA
Barry is a homeowner. He’s 72, mortgage-free, and receives an income from his defined benefit pension plan that covers his needs. He’s unmarried and plans to leave everything to his son.
Barry has been a committed ISA investor. He has a Stocks and Shares ISA portfolio worth £200,000.
At his review, Barry mentions to his financial adviser that he’s concerned about inheritance tax. He had always thought of his ISA as being tax-free, and until recently never gave consideration as to whether that included inheritance tax.
His adviser confirms that, as things stand, Barry’s son would expect to pay 40% inheritance tax when he inherits Barry’s ISA assets, since the family home would use up his allowances.
Barry replies that, ideally, he would like to find a way to invest that retains the tax benefits of an ISA wrapper but without the inheritance tax liability.
Barry finds a solution
Based on Barry’s objectives and attitude to risk, his adviser recommends transferring his Stocks and Shares ISA to an AIM Inheritance Tax ISA which is invested in companies that qualify for Business Relief (BR), a longstanding relief from inheritance tax. Once he has held the shares in his new portfolio for two years, his ISA should be zero-rated for inheritance tax.
Barry remains keen to invest for the long term and understands that this kind of investment targets growth. He understands that as such it is significantly higher risk than most normal Stocks and Shares ISAs.
A BR-qualifying AIM Inheritance Tax ISA invests in a selection of companies listed on the Alternative Investment Market (AIM). Companies are chosen that fit the criteria for qualifying for BR and have the potential to grow or deliver returns for investors.
Barry understands his capital is at risk
Barry should consider this to be a long-term investment. The tax relief afforded to BR-qualifying investments is designed to offset some of the risks of investing in AIM-listed companies. The value of his new ISA portfolio, and any income from it, can fall or rise, and he may not get back the full amount he invests. AIM-listed shares can go up and down in price by more than shares listed on the main market of the London Stock Exchange. They can also be harder to sell.
HMRC will assess whether each company in his portfolio qualifies for BR when he dies. Entitlement to the relief will depend on the companies qualifying when he dies. Tax rules could change in the future. And tax treatment depends on individual circumstances.
Find out more
To learn more about this scenario and to explore other planning ideas, visit here
This blog does not constitute advice on investments, legal matters, taxation or anything else.
We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No.03942880. Issued: November 2022. CAM012569.
