Maximise ISA tax efficiency for your clients even in uncertain times

maximise isa tax efficiency

A growing proportion of the population is finding that, unless they take appropriate action, Inheritance Tax (IHT) will reduce the financial legacy they can leave for their loved ones.

IHT is potentially chargeable on an estate worth over £325,000.  An estate is the total value of a person’s assets including property, investments and cash. IHT is deferred when an estate is left to a spouse or civil partner. However, the next beneficiaries will be responsible for settling that IHT.

This can be a problem. There is a possibility those beneficiaries do not have access to the capital required to pay the liability. While stocks and shares can be sold, other assets – like artwork or property – can have emotional as well as financial value and are less liquid and often harder to sell.

However, there are some easy ways to reduce or remove IHT using established government legislation. Traditional methods of mitigating IHT include placing money into a trust and making gifts. While these are well established routes, they are not always suitable as they involve relinquishing control of capital. There could be more suitable alternatives available for your clients.

ISAs are not free from IHT

A common misconception is that ISAs are exempt from IHT. This is not usually the case unless the investments therein qualify for Business Relief.

Shares held in certain AiM-quoted companies within an ISA qualify for Business Relief and can provide full relief from IHT after two years, in addition to the normal ISA tax benefits.

AiM is sometimes perceived as being more volatile than the markets for larger companies. However, the right portfolio manager can deliver real value for their clients by careful stock selection. This in turn can potentially offer better capital preservation and the prospect of growth.

ISA consolidation

ISA consolidation can be a very effective planning strategy. It means that you can recommend a client transfer all or part of the value of their combined ISAs into one AiM portfolio.

The benefits of doing so are:

  • Removal of IHT liability after two years
  • Easier to manage
  • The prospect of continued growth

Additional Permitted Subscription ISAs

The Additional Permitted Subscription (APS) ISA was introduced in April 2015. This allows the surviving spouse of a deceased ISA holder to acquire an additional ISA allowance, based on the value of the deceased person’s ISA(s) as of the date of birth.

In April 2018, an update to ISA rules created an opportunity for additional tax savings. Investors who pass away on or after 6th April 2018, can have their ISA reclassified as a “Continuing ISA”. The APS allowance can be one of two values. Either the value of the deceased’s ISA(s) as of date of death, or the value when it is closed and stops being a continuing account.

This is subject to a cut-off of three years after the date of death. No money can be paid into it from this point onward. However, it will continue to benefit from the tax advantages of an ISA, so growth inside the wrapper remains tax-free. This hugely simplifies the tax rules and means that ISAs retain their tax efficiency after an investor has died.

How we can help improve ISA efficiency

Our AiM Portfolio Service offers all of the above benefits, and returns are completely free of income and capital gains tax if held within an ISA. Some of our key benefits include:

  • Highly diversified portfolio
  • Capital preservation focus
  • Low fees
  • 12-year performance history

For further information on our range of estate planning services and how they could work for your clients, please call a member of our business development team on 020 3907 6984.