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Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

ISAs (individual savings accounts) can be a wonderful vehicle for investing your money. After all, in 2021-22 you can put up to £20,000 into your ISA(s) and generate interest, capital gains and dividends without tax. Yet one of the drawbacks of an ISA is that, in most cases, they cannot be passed down to beneficiaries without being subject to inheritance tax (IHT). This is unlike a pension pot, which can be given to your loved ones without IHT (although they may need to pay extra income tax on the amount received, if you die after the age of 75).

Is there a way to protect your ISA investments from IHT? Fortunately, in 2021-22 there are still options to mitigate unnecessary tax liability. Our team discusses these in more detail, below. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:

+44 160 334 0827

 [email protected]

 

Make use of allowances

One way to protect your ISA(s) from IHT is to make sure the size – and structure – of your estate is optimised for tax-mitigation purposes. In 2021-22, the typical IHT rate is 40% on the value of your estate over £325,000. You can also pass down an additional £175,000, IHT-free, if your main family home is handed down to “direct descendants” (i.e. a total of £500,000). Moreover, married couples and civil partners are at even more of an advantage because each person can combine these allowances. 

For instance, suppose a husband dies at age 80 and all of his wealth passes to his wife (free from IHT). Two years later, she dies and leaves the total estate – including her home – to her three children. Theoretically, up to £1m could be handed to these beneficiaries, free from IHT. This includes the value of any assets held within ISAs. 

Pension pots are not, currently, counted as part of a deceased person’s estate. So, let’s take the example above a bit further. Suppose the family home is worth £600,000, there are ISA savings worth £200,000, £150,000 in other possessions (e.g. vehicles and furniture) and two pension pots worth £500,000, combined. The total estate – excluding the pensions – is worth £950,000, and so could be passed down to the children free from IHT, including the ISAs. The £500,000 in the pension pots is not counted as part of the estate, meaning that it does not exceed £1m.

 

AIM inheritance tax ISAs

Suppose the value of your estate is over the IHT threshold. Is there a way to protect your ISA savings and investments from unnecessary tax? In many cases, yes. One option is to move the ISA investments into “AIM-listed stocks”; i.e. shares listed on the UK’s alternative investment market. Most of these shares qualify for Business Relief, which can reduce the IHT due on the shares by either 50% or 100% (depending on the business). This would allow you to collect any capital gains and dividends on your AIM shares during your lifetime, and protect them from IHT when you die. However, it is important to recognise that these types of companies are often “higher risk” than publicly-listed ones. You may wish to seek financial advice to make sure that any AIM investments in your portfolio align with your strategy, investment horizon, risk tolerance and overall financial goals.

 

Junior ISA gifts

Another idea is to make use of your “annual exemption”, which lets you give away up to £3,000 each year without worrying about IHT. Here, you could give the money to a child or grandchild by putting it into their Junior ISA. Any interest, dividends or capital gains generated within their account will be tax-free. Up to £9,000 can be put into a Junior ISA each tax year. So, another idea could be to put even more into their account(s) and make use of the “7 year rule” (which exempts your gift from IHT if you survive it by 7 years).

 

EIS investments

For those with a higher risk tolerance for investing, and who have an interest in early-stage companies that have strong growth potential, you might want to consider some EIS-qualifying businesses from inclusion in your portfolio. One little-known benefit of investing in these shares is that they are exempt from IHT if you hold them for at least two years. Currently, you cannot invest in EIS shares via an ISA. However, if you hold liquid assets outside of an ISA (e.g. in a general investment account) which could be subject to IHT when you die, then you might want to speak to your financial adviser about moving some of these into EIS shares.

 

Invitation

Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:

+44 160 334 0827

 [email protected]