The taxman is waiting for your ISA

At Continuum we are great enthusiasts for ISAs.

ISAs are Individual Savings Accounts. The name is a little misleading, as they let you save or invest, depending on which ISA account you choose. A cash ISA is purely for savings, a Stocks and Shares ISA you invest in shares, funds and other types of assets. You can do this on behalf of a child in a Junior ISA, save for a home or retirement with a Lifetime ISA or even get involved in peer-to-peer lending with an Innovative Finance ISA.

UK residents have approaching £700 billion invested in ISAs. For most people they are a key step into wealth creation 

But what they all have in common, and what makes them a great first step for anyone ready to potentially  grow their wealth is the fact that you don’t pay any UK income or capital gains tax on the any returns from the ISA (stamp duty normally applies to funds).

That means that they can potentially grow faster because the taxman does not take a cut while your money is hopefully growing, or when you come to cash them in.

But the taxman is actually just biding his time.

The ISA tax trap

Although all ISAs are normally free of income and capital gains tax, your ISA might be liable to inheritance tax, or IHT. 

IHT is charged at a substantial 40% if a person’s total assets, including their main home, exceed £500k (or £1 million for married couples/ civil partners). So, if you own a larger home in many parts of the country and have some investments, your ISA nest egg could be subject to a tax charge.

ISAs lose their tax-efficient status when you die. This means your beneficiaries will not benefit from tax-free income and growth and might have to declare them in their tax returns.

If your estate is large enough to be liable for inheritance tax, and ISAs form part of it the taxman will be taking a share.

There are, however, two ways to avoid giving the taxman a share of your ISA when you die. 

Leave your ISA to your partner

If you have a spouse or civil partner who survives you, you will probably have made them the beneficiary of your wealth.  It is possible to let them have your ISA investments intact, which means they can go on working for them, delivering tax-efficient  income and potential growth and crucially keeping them out of reach of the taxman.

By making use of a one-off ISA allowance, known as the Additional Permitted Subscription or APS allowance you can leave your ISA to your loved one – not the taxman.

The APS is only available on death and only available if you leave your wealth to your spouse or civil partner. Unusually for a tax allowance it has no set size – meaning that it can be equal to the total value of your ISAs. Your beneficiary can use the allowance alongside their own annual ISA allowance and have the choice of leaving the ISA with the same management company or companies that you used, or transfer them to their own manager. This makes it simple for them to benefit from your investment or to use them to boost their own existing ISA pot.

They can continue to enjoy tax-efficient income and potential  growth whilst the funds remain in the ISA, and crucially, the funds will not be considered for IHT.

However, the taxman may still be waiting for your money. On their death, your – now their – ISA wealth will form part of their estate. Unless they remarry or enter into a new civil partnership, the APS allowance will not apply and inheritance tax will.

Other ways to avoid IHT on your ISA

Leaving your ISA to your partner only postpones IHT charges and would not be the answer if you wanted your ISA to go your children, for example.

There are other solutions. Holding AIM, or Alternative Investment Market investments in a Stocks & Shares ISA could avoid IHT under certain circumstances. But these are high risk investments, and may not be suitable for many people, and you need to fully understand the risks when making investments into these funds, you could lose some or all of your capital

If you are concerned about the taxman helping himself to your ISA after you die, the best solution may be to get some expert help with succession planning. It could help you ensure that after you have gone, it is those you care about who enjoy your legacy – including your ISA, and not the taxman

A session with a Continuum advisor might be the best way to start.

Why not call us today?

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

The levels, bases and reliefs from taxation depend on individual circumstances and may be subject to future change.

Equity investments do not afford the same capital security as deposit accounts

The Financial Conduct Authority does not regulate taxation advice.

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