Investment gains and dividends received within an ISA are not subject to tax. While, not officially part of the ISA family, Inheritance ISAs have become a popular way of preserving wealth for the next generation.
They launched in 2013, when the rules changed to allow savers to invest in smaller companies quoted on the Alternative Investment Market (AIM) through their stocks and shares ISA.
Shares in some companies quoted on AIM can be passed on free of inheritance tax (IHT) under a scheme called Business Relief (BP). If you hold shares in companies eligible for BP for at least two years and still held at date of death, your estate will not have to pay inheritance tax on their value.
The estate of someone with £100,000 worth of stocks and shares in ISAs, plus a house and other assets above the £325,000 limit, they would incur a £40,00 tax charge on their portfolio. If that person had their shares in an AIM IHT Stock and Shares ISA for at least two years, there would be no charge. The combination of investment growth free of tax within the ISA plus the opportunity to pass on wealth tax free, has proved a winning combination.
The government are quite stingy with offering tax breaks to us and we therefore recommend clients try to take advantage of those that are available.
The government does not provide a list of companies eligible for BR, so many savers prefer to use investment managers whom pick companies likely to qualify. These portfolios are quite high-risk investments and savers need to be happy that there is going to be volatility involved. For example, Octopus Investments, a BP manager, fell in value 20% last year but over the past five years it has risen 52%. We will remind clients that positive ISA returns are awarded to the patient investor.
It is also important to keep an eye on charges, not only performance. AIM investing is more expensive than investing in the main markets because there is more legwork involved for managers, but some companies charge high fees, which need to be justified. It’s also worth being reminded that married couples can inherit each other’s ISA portfolios on death, meaning the portfolio remains intact and can continue to deliver tax free income to the surviving partner.
By Philip Harper | March 2019