Until now, the drawback with ISA Investments has always been that, no matter how tax efficient they are during your life, if you do not leave them to either your spouse, civil partner or a charity upon death, they lose their tax exempt status and became potentially liable to Inheritance Tax. Currently, this could mean your estate could be taxed up to 40% of the value of the investment once you have exceeded the Nil Rate Band for Inheritance Tax.
Due to the changes introduced at the start of last month, this no longer needs to be the case, as you are now allowed to invest, within a Stocks and Shares ISA, in shares quoted on the Alternative Investment Market (AIM). While the main idea behind this is to drive investment in smaller companies listed on the exchange and improve growth in these companies, there is also the added benefit that if you hold these investments for at least two years, they qualify for an exemption from Inheritance Tax under the Business Property Relief exclusion.
While Business Property Relief was originally designed so that owners of businesses could pass the control of the company to their children without it being crippled by a 40% Inheritance Tax Charge on the value of the business, it also allows holdings in unquoted shares held on the AIM to be passed in the same way.
This obviously sounds too good to be true. The catch is that investing in unquoted shares is not suitable for everyone as these shares are a higher risk than some other investments due to the fact that they are relatively illiquid and the value of them can vary rapidly. It is for this reason that they would normally only be recommended for someone who would not suffer if they lost a sizable proportion of their initial investment, as there is no point saving 40% on Inheritance Tax if you lose 50% due to a fall in the value of the companies you invest in. It is possible to reduce the risk by spreading your investment across a number of companies, however this is a very specialised area and not one we would recommend being taken without appropriate advice.
At Morton Fraser before giving any advice, we always look at the client's entire situation. We ensure that you, as the client, are comfortable with the risks that you are exposed to, prior to making any recommendation.