Reducing Inheritance Tax with an AIM IHT ISA

An important part of our role as independent financial advisers, who always have our clients’ best interests at heart, is to help to protect your wealth.

Our clients often express frustration that they work hard all their lives, paying all due taxes throughout every life stage, only for further taxes to be levied after they die, if Inheritance Tax applies.

In this article, our expert team at PIL Southampton explains what an AIM IHT ISA is, and how it works as an option that can reduce your Inheritance Tax (IHT) liability.

What are AIM IHT ISAs? 

AIM stands for Alternative Investment Market. AIM Inheritance Tax ISAs are portfolios of AIM-listed shares that are designed to be held in an ISA and that should qualify for Business Relief (BR) – previously known as Business Property Relief (BPR) – from IHT.

In what kind of companies do AIM IHT ISAs invest? 

AIM IHT ISAs invests in AIM businesses that qualify for BR. At July 2024, the AIM consisted of 600 companies with a combined worth of over £2 billion. Whilst companies on AIM are generally smaller than those listed on the main stockmarket, it also includes well-established, maturebusinesses known to be pretty resilient and likely to deliver growth. However, the shares of AIM companies can be volatile and an investment in AIM ISAs is considered to be high risk. 

Why do AIM ISAs get IHT relief? 

AIM ISAs get IHT relief because the companies they invest in all qualify for BR. Having first been introduced in the 1970s to enable family businesses to be passed down to the next generations, in the 1990s it was expanded to include a range of assets including private and certain AIM-listed companies.

The current rules mean that, if you are holding BR-qualifying shares in AIM companies when you die, as long as you have owned them for at least two years by that point, and the companies still qualify for BR at that time, then that part of your estate should quality for 100% IHT relief.

From 6 April 2026, this is reducing to 50% IHT relief.

What are the main benefits of investing in an AIM ISA? 

You benefit from tax-free income and growth and you get to pass on more of your wealth without paying IHT on it. Another benefit is that the IHT relief applies after just two years, which is quicker than some other forms of estate planning.

It’s also a simple and straightforward way of investing and you don’t have to pass certain criteria for age, health or income, although you will have to answer questions about your investment knowledge.

With an AIM ISA, you are free to make withdrawals if your circumstances change and you need to access funds. Any money you withdraw will no longer be protected from IHT.

Your AIM ISA portfolio is managed by a professional team that regularly researches, chooses and monitors the companies they invest in to make sure they remain BR qualifying. 

What are the main risks of investing in an AIM ISA? 

Your capital is not guaranteed and this means the value of your investments could go down and as well as up and you may not get back as much as you originally invested.

An AIM ISA may be less diversified than standard Stocks & Shares ISA portfolios, and the risk of loss can be greater as BR-eligible AIM companies tend to be more volatile.

There is no guarantee that your AIM ISA investment will definitely be IHT free, as tax rules and circumstances can change. 

AIM ISAs are designed for more experienced investors and are not suitable for individuals who couldn’t comfortably absorb any capital loss.

How much can I invest in an AIM IHT ISA? 

The only upper restriction is whatever the current limit is for any ISA, which is currently £20,000 per individual.

If an AIM IHT ISA provider’s minimum investment is higher than one year’s annual ISA allowance, you would need to transfer existing ISA investments in order to access their fund.

Considerations when transferring existing ISAs 

Transferring substantial wealth you have built up in ISAs to an AIM ISA can be an effective way to protect it from IHT.

Before you do, check what transfer-out fees you may incur (you’re unlikely to be charged transfer-in fees). Also keep in mind that your funds will not be impacted by any rises and falls in the market during the transfer period.

And, just to reiterate, AIM IHT ISAs are generally higher risk than some other ISAs, so only go down this route if you are comfortable with the risks and potential consequences.

What happens to my AIM IHT ISA when I die? 

When you die, the AIM IHT ISA manager will usually provide the executor or administrator of the estate with details of the investment so they can claim Business Relief (BR) when they value the estate.

If you have a surviving civil partner or spouse, they will receive a one-off ISA allowance, known as an Additional Permitted Subscription (APS), equal to the total value of your ISAs. This enables them to add your ISA to theirs when you die, keeping the funds in the ISA.

If your ISA is not being inherited by your partner or spouse, the portfolio could be liquidated and shared between your beneficiaries. Or, the portfolio could remain invested for the beneficiaries outside of an ISA, or liquidated so the proceeds could be used to pay Inheritance Tax due on other assets.

How PIL Southampton can help you 

Our qualified and experienced team of independent financial advisers has many years of experience in the area of estate planning, and up-to-the-minute knowledge of the products available in the marketplace that they can advise you on, to best suit your needs and circumstances.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.