Mitigating Inheritance Tax via the ISA Allowance – The Quick Fix?


In the tax year to the end of February, Inheritance Tax (IHT) raised a record £5.3bn, up from £4.7bn for the previous 12 month period.

This reflects that the tax is not just an issue for the very high net worth individual. The tax is now increasingly affecting those families with more modest assets, due to the continually rising values of their homes.

Mike Bracegirdle, a Partner in our Private Client team who specialises in IHT mitigation, looks at an alternative solution.

The Reliefs

All individuals have a nil rate band inheritance tax allowance of £325,000. This could total £650,000 if they leave their assets to their spouse or civil partner. There is an additional allowance if the main home is passed on to a direct descendant, after which their net estate is subject to a 40% charge.

Farmers, Landowners and those with qualifying business interests may also have available to them one of the few additional allowances namely, Agricultural Property Relief (APR) and Business Property Relief (BPR). However, not everyone falls within one of these categories, so what other options are available to those whose estates are set to be subject to this 40% charge?

Tax Mitigation

The easiest way to mitigate IHT is to ensure that your assets fall below the tax threshold as at the date of death. This however takes advanced planning since assets gifted within 7 years of death are brought back into the IHT Computation. In addition, people either do not wish to, or do not have the ability to, give assets away.

The ISA Allowance

If you have not undertaken any IHT planning, have recently inherited money or property and have been advised, that your estate will be liable for a 40% charge to IHT, this option could be for you.

Every individual has an ISA allowance of £20,000 per annum. For a couple this means they can take £40,000 out of their estates for IHT purposes by investing their ISA allowance into the Alternative Investment Market (AIM). AIM shares have been allowed in ISAs since 2013 but the shares must have been held for at least 2 years to qualify.

At first glance, putting £40,000 into AIM may prove too risky for many individuals, especially since the AIM has historically not compared favourably with the FTSE.

However, if a client already has a substantial share portfolio, this investment may be a useful option to mitigate tax liabilities as currently 6% of ISA clients invest in them and the number is likely to increase. It should however be noted that not all AIM shares qualify; currently it is around two thirds of the 947 companies listed on AIM. Companies in which shares are not eligible for IHT relief consist of those whose primary business is dealing in shares and securities, investment companies, or those that mainly own land or buildings.

For those individuals who require more certainty with their investments, putting monies into a pension may be more attractive. Unlike an ISA, which is only useful for IHT mitigation if it is invested in qualifying shares, monies left in a pension are not usually considered part of a deceased estate. With the introduction of ‘pension freedoms’ by the Government in 2017, individuals need not buy an annuity with their pension money at retirement. Therefore, they can keep their money invested and receive income from it.

The fact that ISA money can be withdrawn as much as one wishes without any tax implications, combined with the superior tax efficiency of passing-on pension money, means that it may be better to spend money saved in an ISA before pension money.

The most important lesson to learn here is that if you wish to pass on as much as possible of your wealth tax-free to the next generation, it is never too early to seek advice.

Contact the Butcher & Barlow Private Client team who will be happy to discuss all the various options, their respective advantages and disadvantages and to put together a succession plan which will that will give your spouse or partner and family peace of mind.

Contact Mike Bracegirdle for more information on 01606 334309 or email

Mike Bracegirdle

Mike Bracegirdle