Nearly 14 million over-55s in the UK may be unfamiliar with ISA inheritance tax rules, new research from Octopus Investments has shown, leading to a shock bill for their beneficiaries.
Currently, individuals can pass on an ISA to a spouse or civil partner on death without incurring IHT.
However, one in three (34%) of those surveyed said they plan to bypass their partner and pass their wealth on to children, grandchildren, siblings and friends instead, which could incur a 40% tax charge if all assets exceed the £325,000 IHT allowance.
Octopus said almost three quarters (72%) of over 65s have never checked the rules on IHT and of those, 17% don’t know what the threshold is. Yet, more than one in six (16%) of adults over 65 say their estate is likely to exceed the IHT threshold when they die and Octopus warned that more estates are at risk of breaching the IHT threshold, as a result of rapid house price growth and the current freeze on tax allowances.
Jess Franks, head of retail investment products at Octopus Investments, said: “Thousands more families are being dragged into the inheritance tax net, as tax breaks remain frozen, whist wealth and house prices increase. This is a big concern for people that have worked hard, and saved hard, often with the aim of passing on their wealth to their loved ones.
“Inheritance tax is not widely understood and can therefore get overlooked when it comes to financial planning.” By failing to engage in the rules now, families could face an unexpected bill later, she warned.
Actions consumers can take to try to cushion their assets from IHT, so that they can pass on as much of their wealth as possible, include the option of gifting up to £3,000 every year, choosing to use a trust, or investing in AIM-listed shares as a way of passing on to the next generation.
Martin Holderness, financial planner at Succession Wealth, said: “I work with several clients who have built up considerable ISA pots over the years, only to realise that what they believed to be tax-free savings could actually present a large inheritance tax problem. This can come as quite a shock to many as they prepare to pass their savings on down the generations.
“Luckily, there are alternative ISAs available, such as AlM ISAs, which benefit from Business Property Relief and therefore enable people to pass their shares on without incurring a 40% inheritance tax bill. As we approach tax year end and people consider their financial futures, I would encourage them to seek out expert support to navigate the potential pitfalls that are unknown to many.”
Franks added: “By moving part or all of an ISA portfolio into a BPR-qualifying AIM ISA, you maintain the lifetime benefit of tax-free growth and dividends but can also leave the shares tax free provided you have held it for at least two years when you pass away. For investors who are happy to take more risk with their wealth, this can save your children and grandchildren a significant unexpected tax bill.
“However, investors need to be mindful that the tax reliefs are dependent on the investment maintaining its BPR-qualifying status and their portfolio therefore needs to be actively managed, which is why it’s important to seek professional advice.”
