Martin explains that, due to the APS rules, Sylvia has the opportunity to reinvest some or all of the value of her late husband’s ISA investments into a new ISA of her choosing. This will ensure that she will benefit from the lifetime tax benefits such as tax-free interest, dividends and growth that an ISA wrapper affords.
A way to keep ISA funds invested while planning for inheritance tax
Without any planning, despite the generous lifetime benefits of an ISA, a new ISA taken out by Sylvia will be subject to inheritance tax when Sylvia passes away. At 40%, that would mean an inheritance tax bill of £60,000 on the ISA pot alone, based on its current value. Assuming the pot was split equally, then each of Gordon and Sylvia’s three children would get £30,000. That compares to £50,000 each if the ISA were zero-rated for inheritance tax.
Martin makes an assessment based on Sylvia’s objectives, attitude to risk, capacity for loss and circumstances, including the fact that she doesn’t need to access the amount she inherited from Gordon’s ISA, and the fact that she is keen for that money to stay invested in stocks and shares. He suggests she opens a type of AIM Inheritance Tax ISA that is specifically managed to invest into companies that qualify for Business Property Relief (BPR).
BPR is a longstanding relief from inheritance tax designed to be an incentive to take on the risk of investing in unquoted or Alternative Investment Market (AIM)-listed businesses that meet certain qualifying criteria. APS rules mean Sylvia can make a one-off new investment in such an ISA up to the value of Gordon’s ISA pot. She would also be able to make new annual subscriptions in the usual way of up to £20,000 each year, or to transfer over any ISAs held in her own name if she wanted to.
Once Sylvia has held this ISA for two years, the BPR-qualifying shares can be passed to her children free from inheritance tax when she dies.
Martin makes sure Sylvia understands that this type of ISA will be significantly higher risk than Gordon’s existing Stocks and Shares ISA. Under the circumstances, Sylvia is comfortable with this.
Martin explains the risks
Martin explains that Sylvia should continue to regard this as a long-term investment. The value of a BPR-qualifying ISA, and any income from it, could fall or rise, meaning she may not get back the full amount she invests. So while that £150,000 could grow, she could also end up with less to pass on. Martin also explains that the share price of AIM-listed shares can be more volatile than that of the shares of companies listed on the main market of the London Stock Exchange. They may also be harder to sell.
