Investing in Alternative Investment Market (AIM) listed shares in an ISA can make them fully tax efficient while forming part of a wider Inheritance Tax planning strategy. That’s the strong view of James Rae, Head of Inheritance Tax Portfolio Service, Charles Stanley. In this article, James explains the key things which investors need to know about holding AIM shares in ISAs and the benefits of doing so when it comes to IHT planning.
Despite what lots of people may believe, Individual Savings Accounts (ISAs) do not fall outside of someone’s estate for Inheritance Tax (IHT) purposes. Therefore, individuals could be subject to 40% tax if their assets are worth more than the tax-free threshold – currently frozen at £325,000 until 2028.
If investors are happy to accept a higher level of risk, investing in AIM-listed shares in an ISA could be a great way to pass on assets without any intervention from the tax man. All while maintaining the same ISA benefits – tax-free growth and income. Investing in AIM is the only way to get an ISA out of Inheritance Tax without withdrawing funds from the ISA wrapper.
What happens to an ISA when someone passes away?
Where an ISA is held, the income tax and capital gains tax benefit remain in place during the period of administration or for a maximum of three years from the date of death. After this period, the ISA’s tax-efficient status will effectively be lost when it is passed to the beneficiaries.
The exception to this rule is when an ISA passes to the spouse or civil partner. Following the introduction of the ISA Additional Permitted Subscription (APS) allowance, the surviving spouse’s ISA allowance can be increased by the value of the deceased’s ISA at the date of death or by the value of the ISA at the date of transfer – whichever is higher. This effectively allows the surviving spouse to keep their deceased partner’s ISA’s tax efficient status.
If the deceased’s ISA contained AIM listed shares, then these may have qualified for business relief if they were held for over two years. Qualifying for business relief would mean that the assets are free from Inheritance Tax. It is also worth noting that the transfer of AIM shares, post-death, to the surviving spouse won’t restart this required two year holding period. This can be particularly useful if the deceased held the AIM shares for under two years as the surviving spouse can complete the required holding period.
Do all AIM listed shares qualify for inheritance tax relief?
Business relief is not available where any business (including an AIM-listed one) deals mainly in land or buildings or is involved in making or holding investments. The company also cannot be quoted on a recognised foreign stock exchange – which some AIM companies are. It is therefore important to use a specialised investment manager – one who has the ability to research and understand the full limits of the relief.
Is AIM the answer for everyone?
It depends. AIM shares are generally high risk because businesses are at an early stage and are not subject to the heavier reporting requirements of a full London Stock Exchange listing. They’re more volatile, traded less frequently and are generally seen as higher risk than more mainstream investment, so there’s a high chance that investors could get back less than they invest. This risk should be taken into account; however, there are many AIM companies that have been around for over 100 years and some are currently valued at over one billion pounds. AIM shares should only be recommended for experienced investors or those who have other resources that mean they don’t have to rely on accessing the wealth tied up in their investments in the near future. An AIM ISA should also be considered as part of a wider IHT planning strategy.
What are the main benefits of investing in an ISA AIM portfolio?
• Reduce IHT liabilities – an ideal solution for those who have not put in place long-term plans for their estate. The ISA AIM investments can become exempt from IHT after just two years compared with seven years for a trust or gift, based on current tax relief and legislation.
• Maintain access and control – for your clients who want to maintain access to their capital, unlike lots of alternative Inheritance Tax solutions, providing them flexibility for potential future expenses such as care home fees.
• Attractive growth potential – AIM is home to many innovative and growing companies that have become leaders within their fields. Investors should be willing and able to accept the risks that come with investing in this market.
Working with Charles Stanley
Our specialist AIM IHT planning solution provides clients with a portfolio of AIM-listed shares that qualify for business relief, managed by a dedicated, specialist team. Our AIM IHT service is designed to cater for estate planning and IT business relief for a whole host of clients, including those who:
• want to retain access to capital
• have a power of attorney in place
• want an inheritance tax-efficient ISA
• have sold a business in the last three years
• worry it’s too late
• want to settle assets into trust
• have inherited a spouse’s ISA
As well as being a simple and transparent tax planning tool, investing in our AIM service lets clients maintain control of their assets and offers attractive growth prospects by investing in exciting British businesses.
We’re proud to be shortlisted and winners of many awards and accolades, as they showcase the value of our esteemed colleagues and high-quality services we provide by both our industry peers and clients themselves. We were recently announced winners of the prestigious Best AIM Portfolio Service award at the 9th annual Growth Investor Awards 2023. We previously won this award in 2020 and 2021.
Find out more about our award winning IHT portfolio service here.
About James Rae
James is the head of Charles Stanley’s AIM Inheritance Tax Team and has extensive experience with managing AlM portfolios. Prior to joining Charles Stanley, James worked with Charlotte Square Investment Managers in Edinburgh, where he was the lead manager of the AlM Inheritance Tax Service During his time there. James had one of the best AlM track records in the industry and oversaw a period of very strong inflows.
For more information on how Charles Stanley can partner with your business, contact Head of Strategic Partnerships, Tom Hawkins on 020 3627 3990, or email tom.hawkins@charles-stanley.co.uk.
The value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.
