John Kelly, a wealth management consultant at Mattioli Woods, answers important questions relating to ISAs.
He says: “When clients ask me if individual savings accounts (ISAs) are tax efficient, the answer is invariably ‘yes’.
“However, for certain high net-worth clients, the older they get, the more tax-inefficient they may become.”
Why say they are tax efficient?
John explains: “It is not uncommon for high net-worth individuals to accumulate joint ISAs worth about £400,000 to £500,000 and, in fact, today we are seeing an increase in ISA millionaires in the UK.
“As the ISA becomes a large asset alongside people’s homes and other accumulated savings, they become part of the overall estate subject to inheritance tax (IHT). As you may be aware, the UK Government provides certain allowances for IHT:
- The nil-rate band of £325,000 per person.
- The residence nil-rate band of up to £175,000 per person.
- IHT-free pension death benefits.
- IHT business relief.
- IHT agricultural property relief.
What relief to you get on an ISA?
“Nil and your joint £500,000 ISA portfolio could be subject to £200,000 IHT after your allowances have been used up,” answers John.
“Everyone I speak to will say they do not want to lose the tax benefits of an ISA until, of course, they look at potentially losing 40% of the value of their ISA portfolio in tax when passed on to their beneficiaries.
“An option to consider with the existing benefits, which the government introduced in 2013, is the alternative investment market (Aim) ISA. An Aim ISA invests in a portfolio of assets that have the potential to qualify for business relief.
“A very specialist investment area, the shares within the portfolio could qualify for full relief – saving up to 40% IHT after holding the assets for more than two years. This still retains access to and control of the ISA, while enhancing the existing tax benefits.”
What is the downside?
According to John: “Essentially, most people view the Aim market as having more risk and it does potentially have more as the companies are invariably much smaller than the FTSE 100 Index that everyone is familiar with.
“The Aim portfolio will be managed by a professional manager and as long as the shares are held for at least two years, and provided you still hold them on death and, from a legislation point of view, they remain qualifying, the portfolio should be IHT-free.
“Tax advice should always be sought. Aim ISAs invest in Aim listed companies that qualify for business relief. Aim is a diverse index comprising about 850 companies with market capitalisations anywhere between £100,000 and £3.7 billion.
“Aim IHT portfolio managers tend to focus on established, larger, mature businesses. They should be more resilient and deliver growth but can be quite volatile. When you invest in an Aim portfolio, you acquire shares in the underlying companies.”
How can I invest in an Aim ISA?
“You can make contributions using your ISA allowance of £20,000 per individual every tax year into an Aim ISA,” explains John.
“Furthermore, you can transfer unlimited amounts from existing ISAs to the Aim ISA, giving you the flexibility to transfer a percentage of your existing ISAs or transfer smaller amounts over time.
“Alternatively, you can always revert back to a traditional stocks and shares ISA if your circumstances change.”
All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances.
To find out more about Mattioli Woods and its wide range of products and services, contact Wendy Atkinson, the firm’s business development manager by emailing: wendy.atkinson@mattioliwoods.com
