ISAs AND INHERITANCE TAX – KNOW THE FACTS
ISAs are a great way to save, and there are now several types, each designed to help young and old, home buyers and children save for their future. But while ISAs are tax-efficient during your lifetime, they may have disadvantages when it comes to Inheritance Tax (IHT).
It’s easy to think that ISAs are tax-free, full stop. After all, when the then Chancellor, George Osborne, announced that from 2015 they could be passed on without incurring tax, the
move was widely welcomed. It meant that a widow or widower wouldn’t face a tax bill if they inherited an ISA from their spouse. This is achieved by what’s called an “additional permitted subscription” allowance (APS), which is equivalent to the amount the deceased held in ISAs at the date of their death, and is in additional to the normal ISA allowance. What’s more, the surviving spouse is still entitled to the APS
even if their spouse or civil partner leaves the funds in their ISAs to someone else.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.
Passing ISAs on
However, ISAs are still included in calculating the value of a deceased’s estate. While funds left to a spouse are free of IHT, those passed directly to children or other beneficiaries are not. IHT is payable at a rate of 40% on the value of your estate over the current individual allowance of £325,000.
This means that it may be preferable for IHT planning purposes to think about passing on your pension to future generations and living off the tax-free income from your ISAs. However, everyone’s circumstances differ, so it’s important to get financial advice that’s tailored to your particular circumstances.
Tax treatment depends on individual circumstances.
Tax treatment, rates and allowance are subject to change.