30 Jan We could lose 40% of our ISA to the tax man on death – Why not seek an “alternative” ?
The humble ISA wrapper has protected our savings and investments from tax while we have been growing our assets, but ISAs are not exempt from Inheritance Tax (IHT). That means when we bequest our ISA to the next generation we could lose 40% of it to the taxman.
For ISAs to live up to their tax free billing on death the ISA needs to be invested in Business Property Relief (BPR) qualifying assets. These can be found on the Alternative Investment Market (AIM).
There are several big fat warnings to consider at this point:
- AIM listed company share ownership involves more risks than owning shares listed on the main London Stock Exchange. It’s blue chip v chocolate chip, super tanker v dinghy. This alternative market is for companies that would not meet the conditions for a listing on the main market. They are smaller companies, there is less demand for the shares and so they are not always easily sold on if you want out, they are more volatile/less resilient and at greater risk of failure. We could end up with less than we invested and possibly lose even more than the 40% IHT charge we are trying to mitigate.
- Not all AIM listed companies are BPR qualifying and some that qualify currently may not continue to qualify in the future. It takes a specialist in this market to select and monitor the appropriate shares so we needs to be willing to pay active fund management charges if we intend to paddle in this pond.
Having given you the bad news here is the good:
- These companies are often pioneering, nimble, exciting and some of them will grow up to be future leaders and we can participate in their success J (or failureL).
- If they qualify for BPR and we have owned them for at least two years we can pass them onto out kin without liability to Inheritance Tax.
- Consider whether we need all we have saved into ISA for our own use in our lifetime. If we are only keeping it as a “just in case” fund , then maybe we could afford to invest some in AIM shares with a view to passing it onto the next generation without incurring an Inheritance Tax liability. Who knows we may even strike it lucky and make a shed load of money during the exercise!
- Seek independent financial advice before making any decisions in this area. Talk it though with an experienced financial planner and see if the idea works for you in your circumstances.