Avoid paying inheritance tax on your ISA – a useful tool in your estate-planning armoury!

User Written by Cindy-Marie Leicester on January 24, 2016.

Avoid paying inheritance tax on your ISA – a useful tool in your estate-planning armoury!

Disclaimer: Infinity is not licensed or qualified to give tax advice.
This article is intended for information only and does not constitute tax advice. If you are in any doubt about your tax status please contact a qualified professional.

ISAs are tax exempt Individual Savings Accounts which were first introduced in the UK in 1999. Since then millions of Brits have held either cash or stock and share ISAs as a tax relief tool, often referred to as a wrapper. In 2014-15 there were 13 million adult ISA accounts and the Exchequer estimates that the cost of tax relief for ISAs in the same period was around £2.6billion.

Part of the attraction of an ISA is that savings held in them are exempt from income tax on interest, dividends and capital gains. There is no limit on how much can be saved over a lifetime although there is a limit on how much can be invested each year. For the current tax year (2015/2016) the limit is £15,240 which, since the rules were relaxed in 2015, can be split between cash and stocks and shares as desired.

One of the downsides of this kind of investment however, is that the tax benefits enjoyed by the holder cease on their death which means that an ISA is included in the deceased’s estate and is therefore subject to inheritance tax (except in the case of a transfer to a surviving spouse in which case the ISA’s tax-free benefits are now passed on since a law change in December 2014).

There is, however, a cunning way around this since changes made in August 2013 which allow AIM listed shares to be held in ISAs. AIM is the Alternative Investment Market – the London Stock Exchange’s international market for smaller but growing companies. These could be relatively new businesses backed by venture capital or more established companies seeking access to capital growth in order to expand. According to figures from December 2015 there are 1,044 companies listed on AIM with an aggregate value of £75million. The advantage of investing in these companies through a stock and share ISA as opposed to companies which are listed on the main stock market is that they qualify for Business Property Relief at 100% which means that they represent an investment that really is tax-free.

Of course as with any investments, there is risk involved – returns are not guaranteed, stock performance can be volatile and capital could be lost – however those ISA holders over retirement age, of which there are estimated to be over 5 million, may consider the risk worthwhile when weighed up against inheritance tax payable at 40%.

If you’d like more information on estate-planning tools which will save you money, please get in touch and I will be happy to help.

Disclaimer: Infinity is not licensed or qualified to give tax advice.
This article is intended for information only and does not constitute tax advice. If you are in any doubt about your tax status please contact a qualified professional.