Case Study: Inheritance Tax – The ISA Trap

Like thousands of people across the UK, 72-year-old Jim is concerned about inheritance tax. His house is worth more than £325,000, so his daughter Sarah will have to pay 40% tax on much of his estate when he dies. This includes the ISA investments he’s been building up over the years.

He’d like to find a way to invest that retains the tax benefits of an ISA wrapper, without the inheritance tax liabilities. Jim talks to us and we suggest an AIM Inheritance Tax ISA. It comes with the same tax benefits his ISAs have always enjoyed, but after two years the ISA becomes free from inheritance tax, assuming it is still held at the time of death. It also offers access to the growth potential of carefully-selected UK smaller companies.

The AIM Inheritance Tax ISA places Jim’s money in a selection of companies listed on AIM (the Alternative Investment Market). Certain AIM-listed companies qualify for
Business Property Relief (BPR). BPR is an investment incentive which has been part of primary inheritance tax legislation since1976. Over the past decade it has become an increasingly mainstream option for investors interested in reducing the inheritance tax liabilities potentially due on their estate. After holding the Octopus AIM Inheritance Tax ISA for two years, the investment should become free from inheritance tax.

The estate planning benefits of this ISA make it particularly suitable for ISA transfers, especially with older clients who have large estates, have built up significant ISA portfolios, and who are comfortable with the increased risk of investing in smaller companies.

Many forms of inheritance tax planning put money permanently out of an investor’s reach. This can be very restrictive in terms of dealing with any challenges that come up in the years before they pass on. However, by choosing an investment that is exempt from inheritance tax, they can keep it in their own name and feel reassured that the money is accessible when required.