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As many as 13.9 million over 55s could be unaware of ISA inheritance tax rules


13.9 million UK adults over the age of 55 (66 per cent) may be unfamiliar with inheritance tax (IHT) rules relating to ISAs, despite plans to pass them on to the next generation, according to new research from Octopus Investments, part of Octopus Group. 

Octopus surveyed a nationally representative sample of 2,000 UK people aged 55 or over on their understanding of ISA IHT rules.  Currently, as with other assets, you can pass on an ISA to a spouse or civil partner on death without incurring IHT – however, one in three (34 per cent) of respondents plan to bypass their partner and pass their wealth on to children, grandchildren, siblings and friends instead, which could leave beneficiaries on the hook for a 40 per cent tax charge, if all assets exceed the IHT allowance, which is currently GBP325,000.

Octopus’ research found that mixed understanding and a lack of preparation for passing on wealth is particularly problematic for those at, or in retirement. Almost three-quarters (72 per cent) of over 65s – which would equate to 9 million people, relative to the UK population – have never checked the rules on IHT and of those, 17 per cent don’t know what the threshold is.

With more estates at risk of breaching the IHT threshold, because of rapid house price growth and the current freeze on tax allowances, urgent education is needed around IHT rules on ISAs.

16 per cent of UK adults over 65 say their estate is likely to exceed the IHT threshold when they die – but this number could be much higher – especially given low levels of engagement with the rules. The research found that one in five (21 per cent) over-65s are already near to, or over the IHT threshold – with this group owning one or more properties (average property price GBP288,0002) and over GBP100,000 of assets. 

A further 17 per cent worry house price growth will tip them over the threshold, at which point IHT comes into play. 

Jess Franks, Head of Retail Investment products at Octopus Investments, says: “Thousands more families are being dragged into the inheritance tax net, as tax breaks remain frozen, whist wealth and house prices increase. This is a big concern for people that have worked hard, and saved hard, often with the aim of passing on their wealth to their loved ones. 

“Inheritance tax is not widely understood and can therefore get overlooked when it comes to financial planning. But, by failing to engage in the rules now, it may mean your family face an unexpected bill later. The good news is there are plenty of things you can do in your lifetime to try to cushion your assets from IHT, so that you can pass on as much of your wealth as possible”.

There are a number of choices available to those who currently have an ISA, or other investments and savings, they wish to pass on to the next generation:

•    Gifting – you can gift up to GBP3,000 every year free from inheritance tax.  If you want to give away more, you’ll need to survive for at least seven years before larger gifts are IHT free. But with gifting you do lose access to the assets straight away.
•    Trusts – trusts can be used to make sure that assets are given to beneficiaries in a timely and controlled manner, sometimes without incurring an inheritance tax bill. But they can be complicated to set up, and similar to making a gift, certain conditions need to be met, including living seven years after placing assets in a trust, for them to be free from IHT on death. ISAs also can’t be held in Trusts.
•    Investing in AIM listed shares – Investing in certain AIM listed shares means people can reduce their tax liabilities without giving away their wealth during their lifetime. Certain AIM companies qualify for Business Property Relief (BPR), an investment incentive which has been part of primary inheritance tax legislation since 1976. Shares that qualify for BPR can be left free from IHT as long as they have been owned for at least two years at the time of death. BPR exists to encourage investors happy to take on more risk to invest in smaller companies supporting UK growth. It can be a way to plan for your estate without giving up access to wealth. Investors can invest their GBP20,000 annual ISA allowance, as well as transfer existing ISA pots.

Martin Holderness, Financial Planner at Succession Wealth says: “I work with several clients who have built up considerable ISA pots over the years, only to realise that what they believed to be tax-free savings could actually present a large inheritance tax problem. This can come as quite a shock to many as they prepare to pass their savings on down the generations.

“Luckily, there are alternative ISAs available, such as AlM ISAs, which benefit from Business Property Relief and therefore enable people to pass their shares on without incurring a 40 per cent inheritance tax bill. As we approach tax year end and people consider their financial futures, I would encourage them to seek out expert support to navigate the potential pitfalls that are unknown to many.”

Franks says: “By moving part or all of an ISA portfolio into a BPR-qualifying AIM ISA, you maintain the lifetime benefit of tax-free growth and dividends but can also leave the shares tax free provided you have held it for at least two years when you pass away. For investors who are happy to take more risk with their wealth, this can save your children and grandchildren a significant unexpected tax bill. 

“However, investors need to be mindful that the tax reliefs are dependent on the investment maintaining its BPR-qualifying status and their portfolio therefore needs to be actively managed, which is why it’s important to seek professional advice if you want to invest in BPR qualifying shares. AIM IHT portfolios are higher risk than mainstream ISAs and should form part of a balanced portfolio. Investors also need to recognise that their own individual circumstances and legislation may change in the future, which could affect the tax reliefs.”  

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