ISA season has just finished – there is always a rush in ISA investments before the allowance expires on 5 April – and as the dust settles it is a good time to review the tax status of ISAs. Because although ISAs are income tax and Capital Gains Tax free, many investors fail to realise that ISAs are not exempt from Inheritance Tax.
There are two ways to avoid an IHT bill on ISAs. The first is if the ISA passes to a spouse or civil partner, as all transfers between spouses/civil partners are exempt from IHT. The surviving spouse/partner also inherits an additional permitted ISA allowance equal to the value of the deceased’s ISA so they can transfer the money to their own ISA and continue to benefit from the income tax and capital gains tax benefits. However, on the surviving spouse/partner’s subsequent death the full amount will be part of their estate and potentially subject to IHT if they exceed the nil rate band (currently £650,000 jointly for couples).
The second way to avoid IHT on an ISA is if the ISA invests in shares that qualify for business property relief. These are small trading companies that are either unlisted or listed on the Alternative Investment Market (AIM, London’s junior stock market). Shares in these companies are exempt from IHT once they have been held for two years. They are, however, high risk and illiquid (i.e. harder to buy and sell) compared with shares in companies listed on the main stock market. Investors would need to be comfortable with the associated investment risks and it is likely they would need to invest through a specialist fund manager rather than pick the stocks themselves.
To discuss this and other estate planning solutions please contact Richard Higgs CFP FPFS on 0117 966 5699 on email@example.com.