ISAs, the Alternative Investment Market, and Inheritance Tax
ISAs: Tax free savings - not from Inheritance Tax!
For investors and advisers ISAs, with their combination of income and capital gains tax benefits and continued access to the invested money, are the investment wrapper of choice. So well known are the tax advantages of ISAs it is often forgotten by investors and even advisers that once a person dies these assets drop into the estate for the purposes of inheritance tax.
Recent changes have meant that the ISA allowance is now transferable to the spouse but this only increases the value of the ISA assets for inheritance tax when they pass to the next generation.
ISAs: A brief history
The ISA started life in 1986 when the then Conservative Government introduced the Personal Equity Plan to encourage greater share ownership in the UK. This was followed in 1992 by the single company PEP and then eventually the ISA in 1999.
Had you faithfully saved the maximum you would have invested in £283,800 in your ISA, including this year’s allowance. This is before any investment return. This means that there are many investors with hundreds of thousands of pounds in ISAs, and even a lucky few with millions of pounds in these wrappers. The annual ISA allowance is £20,000 so the numbers of people with substantial ISA pots is only likely to increase.
AIM: Using Business Relief
Until August 2013 the only way for an investor to shield their ISA assets from Inheritance Tax was to remove the assets from the ISA and invest them in a Business Relief scheme. These schemes work by taking advantage of the long standing Business Relief rules which allows an investor to pass unlisted shares to their heirs free of tax if they have been held for at least two years and continue to be held at the time of death.
These were focused either on capital preservation or on investments in equites listed on the Alternative Investment Market. Capital preservation style schemes benefit from greater security of capital but commensurately lower rates of return. AIM investments benefit from the potentially higher return of equity investments but with the associated volatility. In doing so investor lost the income tax and capital gains tax benefits of the ISA, something many were reluctant to give up.
This changed when AIM stocks were allowed to be included in ISAs. ISA investors now have the option of substantially removing these assets from Inheritance Tax via an investment in AIM shares either directly or through a specialist AIM investment service. This combines the Inheritance Tax benefits of many AIM shares with the Income Tax and Capital Gains Tax benefits for an ISA.
The difficulty is that not all companies on AIM qualify for Business Relief. More importantly a company can lose its Business Relief for example by moving to the main list of the London Stock Exchange. At Puma Investments we not only do a full assessment of a company’s Business Relief qualifying status prior to acquisition we constantly monitor the companies to ensure they continue to qualify for Business Relief.
Puma: Investment Process
For an adviser recommending using an AIM Inheritance Tax Service like that offered by Puma Investments, it is important to understand the Investment Process.
At Puma Investments we look for three key factors when assessing an investment: quality, growth and valuation. While we aim to buy high quality, high growth businesses on a low valuation this is not always achievable and most investment decisions involve a trade-off between these three factors. For us quality means looking for a business that creates economic value by having a return on capital above the cost of capital.
We are also looking for defensive businesses, with a distinguishing characteristic such as brand that prevents the company’s profits being competed away. We want to invest in companies that grow through reinvesting the cash they generate to create shareholder value.
Finally there is a price for everything and we only buy businesses that are trading at a discount to our estimate of fair value.
ISAs, AIM and IHT mitigation
So for an investor with a substantial ISA already invested in shares, they can maintain their ISA wrapper, keep an exposure to the potential long term growth of equites and in the right circumstances benefit from Inheritance Tax mitigation.
Justin Waine, Investment Director
The Puma AIM IHT Service is an award-winning discretionary portfolio service, available in ISAs, that seeks to mitigate IHT by investing in a carefully selected portfolio of AIM Shares. The team is led by Justin Waine, an Investment Director with 18 years' experience specialising in small and mid-cap companies.
Financial advisers can access the Puma AIM IHT Service via leading Platforms: Ascentric, Standard Life and Transact.
Watch our 60 second video and discover how the Puma AIM IHT Service could be used to Inheritance Tax proof ISAs.