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Death, IHT & ISAs

by Chris Bate on 06·02·2018

The only things that seem certain in this day and age are death and the election pollster's haven't a clue. I deliberately avoided taxes as with a bit of judicious planning quite a few taxes can be legitimately avoided if you wish to take some positive action.

With the individual ISA allowance now sitting at £20,000 per annum, it won't take long for some very substantial amounts to build up, particularly with couples.

The only real difficulty for couples in respect of the tax regime potentially arises on the second death. Without taking any action the combined ISA's will be subject to IHT on the death of the last survivor.

The question is, what can be done to avoid IHT on the last death?

ISA's as we all know have some major tax advantages for individuals and couples whilst the funds are held within the ISA.

So, a couple of rhetorical questions:

  • As an individual investor, why would you hold large amounts of investments outside this tax efficient environment?
  • As an individual investor, why would you not take advantage of your yearly ISA allowance if you can afford it?
  • In the whole investment arena why do large volumes of money still sit outside ISA's?

With a bit of relatively straightforward planning utilising ISA's, significant amounts of tax and IHT could be avoided.

How many investors/clients really appreciate the use of the APS Allowance (Additional Permitted Subscription)?

On death not only can the ISA be passed free of IHT to a spouse or civil partner, but the investments in the ISA still retain their tax efficient status. So again why have substantial investments outside this facility?

The usual difficulty we see with elderly clients whether as partners or on their own is what happens on death. Most clients just accept that the ISA will be subject to IHT once they are on their own.

Most clients won't know about, or understand Business Property Relief (BPR) and the impact this can have on the amount of their estate subject to IHT.

Simplistically, converting the ISA in part or as a whole into an AIM listed portfolio potentially removes these funds from any IHT bill on death after two years, by gaining 100% BPR.

Making clients aware of what they can and can't do is paramount. Timing is everything given the need to survive two years. The death of the first partner is a point in time when everything financial is likely to be reviewed and this opportunity can be discussed.

But why not do it earlier? For the right clients, the ISA could have been converted to an AIM portfolio two years before death. This would then allow it to be willed to someone other than the Spouse or Partner without any IHT being liable. The interesting by product of this is that the remaining Partner can still use the value of the ISA as an APS even though they didn't receive it.

Lets say the ISA was valued at £50,000. They could utilise the APS Allowance of £50,000 and their own ISA allowance of £20,000, giving them the ability to invest £70,000 into an ISA in that Tax Year.

In the age of divorce and second and third marriages and children by multiple parents this is worth bearing in mind about who and how clients wish to leave their estates to in the most tax efficient way.

Clearly there are investment risks involved and lots of other considerations to take into account to assess its suitability. However the other major risk and potential certainty is a potential loss of 40% to the revenue if the IHT threshold is breached. If a client doesn't need or won't ever use the ISA funds, why would you look to give away 40%?

Clients with ISA's both valued at £100,000 would be in a position to save IHT of £80,000 on the second death, if the estate exceeded the IHT threshold. Timely education and planning could negate this.

Even with an AIM portfolio, ISA's still give the flexibility to take a regular tax-free income, which is a factor that crops up on a regular basis.

By considering converting some or all of the ISA into an AIM listed portfolio within the ISA creates some very interesting scenarios for clients to consider.

Clients can't do what they don't know about, most would probably appreciate a discussion and it reinforces the consultative approach and what might be best for them.

A clever use of ISA's could substantially benefit most clients.