Stand-out Q – TYE planning #1…

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FRI, 24 MAR 2017

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question

Are ISAs attractive products as part of IHT planning?

Answer
Since August 2013, ISAs have been attractive for inheritance tax planning strategies as they can hold AIM listed shares. AIM shares may qualify for business property relief (BPR) for inheritance tax purposes after 2 years of ownership, reducing the net chargeable estate for IHT. This means that the first AIM shares could qualify for BPR within an ISA from August 2015 (depending on the date of purchase).

When the first spouse or civil partner dies and the survivor inherits the shares, the total ownership period of the survivor will include both their own and the inherited periods of ownership. The problem was that the inherited shares would no longer be held within an ISA wrapper for income tax and capital gains tax purposes, and re-investment would be required within an ISA wrapper to get these tax benefits back. Where a large ISA holding had been built up, this would need to drip back in to the ISA regime over several years and would use up the survivor’s annual subscription limits.

The other complication is that it is not generally possible to make in specie transfers to an ISA, meaning that reinvestment of the shares required a sale of the shares and a repurchase within the ISA. This could potentially cause two further tax problems: CGT could arise on the sale; and the 2 year ownership window restarted for BPR purposes. This was not entirely satisfactory.

However, from 6 April 2015, a surviving spouse could inherit their spouse or civil partner’s ISA allowance where the first death occurs on or after 3 December 2014, and in specie transfers of shares will be allowed from 6 April 2015 onwards. These changes mean that the issues identified above will be tackled:

• The in specie transfer avoids any CGT liability as no sale is required;
• The shares used to fund the additional subscription will continue to benefit from the ISA wrapper; and
• The period of ownership isn’t broken for IHT purposes.

Although AIM investments can be higher risk investments, investing in AIM shares through an ISA continues to look increasingly attractive as part of IHT planning. From 6 April 2015, surviving spouses and civil partners will be able to benefit from all of the ISA benefits while investing in an IHT friendly way within their ISA and it is well worth ensuring ISA savings are maximised to take advantage of this planning opportunity.

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