Is another storm brewing? My question relates to a subject that seems to move in cycles of popularity and focus: inheritance tax (IHT).
We are more than five years on from the 2008 financial crisis with economic indicators saying the UK is doing well.
There is talk, and evidence, of house prices rising at rates well in advance of inflation, which is welcome news to older UK citizens.
The Budget in March also revealed the Isa limit will rise to £15,000 from July 1 and there will be greater flexibility on Isa transfers. Many savers 55 and older will have greater flexibility to take the total amount of their pension pots subject to their marginal tax rate.
It would seem that many are looking to save, backed up by figures from HMRC’s 2013 Isa statistics:
• Around 14.6m adult Isa accounts were subscribed to, 80 per cent of which were cash Isas;
• Roughly £57bn was invested in adult Isas that year, 8.6 per cent up on the previous one;
• Average amounts invested are rising and the total amount held in Isas is well north of £400bn.
If we then look at last year’s HMRC IHT statistics it would appear there was a big drop in 2007-08 in the amount of IHT paid. This was due to two factors: the financial crisis and the introduction of the transferable nil-rate band.
However, the direction of travel since then has been inexorably upwards and when we see this year’s statistics it could be close to the peak of tax paid in the past. The other area worth looking at is the number of taxpayers by estate band.
The sector that the cyclical nature of IHT affects the most is estates worth between £500,000 and £1m. These are people who are often unaware of their potential IHT issues as their properties can be a large part of their wealth. The other factor that is often missed is exactly what other assets are held and the potential tax treatment of these. It is here that it is worth going back to the Isa.
Undoubtedly Isas have been a huge success story as a tax-efficient savings vehicle and they are a foundation of advice and financial planning.
But a fact that worries me slightly is that the age group with the highest number of Isa holders is the over 65s. Of this group, more than half are still actively subscribing. This could well be an excellent thing to do for the majority of these people, but when you have a financial plan, you have to consider all taxes and one that gets overlooked on many occasions is IHT.
It is fair to say an Isa is not ideal for anyone who may have an IHT problem as they must be held in an individual’s name and they cannot be put in trust. If anything were to happen the full value would sit in a person’s estate and potentially be liable to IHT at 40 per cent.
This asset, added to an individual’s property, could well be enough by themselves to use up the IHT nil-rate band. In isolation, using the Isa allowance is a great idea, as part of a financial plan it may not be quite so attractive.
Andy Zanelli is head of retirement planning at AXA Wealth
KEY FIGURES
40% – Inheritance tax rate on estates over the nil-rate band
£325,000 – Current IHT nil-rate tax band
14.6m – Number of Isas subscribed to in 2012-13
£57bn – Amount invested in Isas in 2012-13
