Inheritance Tax & ISAs : An Unwelcome Surprise?
A recent survey has highlighted a widespread lack of understanding regarding Inheritance Tax regulations particularly in relation to ISAs. Only a quarter of those surveyed realised that the investments could form part of a persons taxable estate and were therefore liable for IHT. The survey illustrated that only 28% of those aged 55 and over knew that ISAs were not exempt from inheritance tax compared with 18% of 18-34 year olds.
This misapprehension is causing concerns that some families will end up with an unexpected tax bill because they do not know the rules. Over half (54%) of respondents said they didn’t know whether ISAs were exempt from IHT and a fifth (21%) incorrectly thought they were. The exception to the rule is when ISAs are passed onto a spouse on death, thanks to rules established in 2014. Of course when the 2nd spouse dies they will form part of that persons estate for IHT purposes.
Since pension freedoms, it has become more tax efficient to pass on a pension than an ISA because defined contribution (DC) pensions are free of IHT. Therefore, for those in the position of being able to draw on assets like ISAs, the pension pot should be the last thing to touch.
However, in the case of final salary or defined benefit (DB) schemes the benefit stops when your spouse dies. If you both die early, all benefits immediately cease. Equally, if you are widowed or divorced the DB pension will end on your death, and no benefits will be paid to children or grandchildren.
Researchers explained that this is not just a problem for the super wealthy. Many more families on modest incomes will have their loved ones’ Estates subject to Inheritance Tax because of property prices, particularly in London where the average property price stands at £484,000. With more people likely to be liable for inheritance tax each year it is clear more should be done to raise awareness.
It is important to recognise that it’s not your estate value now that applies, but the value of the estate on the 2nd death of a married couple that will be liable to IHT. If you are in your 60s now it could potentially double by the time you both pass away.
Do call us if you require our help or any advice.
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