Some clients are very attached to their ISA, but they can still do inheritance tax planning.
For this week’s Tax Angle, I thought I’d talk about ISAs.
Specifically, a scenario we see fairly often at Octopus, which is probably familiar to you as well. An older client has diligently saved into their ISA for many years, building up a significant pot of wealth in the process. It’s easy to understand from the client’s perspective why they don’t want to contemplate taking wealth out of their ISA wrapper, even when it becomes highly unlikely that the ISA will be required to cover their needs during the rest of their life.
That often leaves the ISA pot facing a 40% inheritance tax bill when they die. Our recent research has shown that 79% of ISA investors surveyed didn’t realise that their ISA could be subject to inheritance tax1, the assumption being that “tax free” extends to inheritance tax as well.
So here’s a way you can help a client to plan for their estate while leaving their ISA pot in place within the ISA wrapper.
Barry wants to keep his ISA
Barry is a homeowner. He’s 72, mortgage-free, and receives an income from his defined benefit pension plan that covers his needs. He is unmarried, and plans to leave everything to his son Peter.
Barry has been a committed ISA investor since ISAs began in 1999. Before that, he regularly saved into a PEP. He now has a Stocks and Shares ISA portfolio worth £200,000, as well as £50,000 in his Cash ISA, which has built up in recent years through profit-taking on investment positions.
At his review, Barry mentions to Claire, his financial adviser, that he is concerned about inheritance tax. He had always thought of his ISA as being tax-free, and until recently never gave consideration as to whether that included inheritance tax. Claire confirms that, yes, as things stand, Peter would expect to pay 40% inheritance tax when he inherits Barry’s ISA assets, since Barry’s home would use up his allowances.
Barry replies that, ideally, he would like to find a way to invest that retains the tax benefits of an ISA wrapper but without the inheritance tax liability.
Claire recommends a solution
Based on Barry’s objectives and attitude to risk, Claire recommends transferring his Stocks and Shares ISA to an AIM Inheritance Tax ISA specifically managed to invest into companies that qualify for Business Property Relief (BPR), a longstanding relief from inheritance tax. Barry remains keen to invest for the long term and is comfortable with any short-term volatility. He understands that an AIM Inheritance Tax ISA is significantly higher risk than most normal Stocks and Shares ISAs.
A BPR-qualifying AIM Inheritance Tax ISA invests in a selection of companies listed on the Alternative Investment Market (AIM). Companies are chosen that fit the criteria for qualifying for BPR.
