However, for certain high-net-worth clients the older they get, the more tax inefficient they may become.
Why say they are tax inefficient?
It is not uncommon for high-net-worth individuals to accumulate joint ISAs of circa £400,000 to £500,000 and in fact, today, we are seeing an increase in ISA millionaires in the UK.
As the ISA becomes a large asset alongside people’s homes and other accumulated savings, they become part of the overall estate subject to inheritance tax (IHT). As you may be aware, the government provides certain allowances for IHT some of which are summarised below:
the nil-rate band of £325,000 per person
the residence nil-rate band of up to £175,000 per person
IHT-free pension death benefits
IHT business relief on a business
IHT agricultural property relief
Annual gifts of £3,000 per annum
What tax relief do you receive on an ISA?
Nil. Unlike a pension plan there is no tax relief on payments into an ISA. The tax break is that you do not pay tax on investment gains or income.
However from a IHT point of view, your joint £500,000 ISA portfolio could be subject to £200,000 tax after your allowances have been utilised.
Everyone I speak to will say they do not want to lose the tax benefits of an ISA until of course, they look at potentially losing 40% of the value of their ISA portfolio in tax when passed onto their beneficiaries. An option to consider with the existing benefits, which the government introduced in 2013, is the alternative investment market (AIM) ISA.
What is an AIM ISA?
An AIM ISA invests in a portfolio of assets that have the potential to qualify for business relief. A very specialist investment area, the shares within the portfolio could qualify for full relief saving up to 40% IHT after holding the assets for more than two years. This still retains access to and control of the ISA, while enhancing the existing tax benefits.
What is the downside?
Essentially, most people view the AIM market as having more risk and it does potentially have more risk as the companies are invariably much smaller than the FTSE 100 Index that everyone is familiar with.
The AIM portfolio will be managed by a professional manager and, as long as the shares are held for at least two years, and provided you still hold them on death and, from a legislation point of view, they remain qualifying, the portfolio should be IHT free. Tax advice should always be sought.
AIM ISAs invest in AIM companies that qualify for business relief. AIM is a diverse index comprising about 850 companies with market capitalisations anywhere between £100,000 and £3.7 billion. AIM IHT portfolio managers tend to focus on established, larger, mature businesses. They should be more resilient and deliver growth but can be quite volatile. When you invest in an AIM portfolio, you acquire shares in the underlying companies.
How can I invest in an AIM ISA?
You can make contributions using your ISA allowance of £20,000 per individual per tax year into an AIM ISA. Furthermore, you can transfer unlimited amounts from existing ISAs to the AIM ISA, giving you the flexibility to transfer a percentage of your existing ISAs or transfer smaller amounts over time. You can always revert back to a traditional stocks and shares ISA if your circumstances change.
This article has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods Limited and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns. Mattioli Woods Limited is authorised and regulated by the Financial Conduct Authority.
Content correct at time of writing.
