Individual Savings Accounts can be hit for 40% tax on death. This week Tim Bennett looks at two ways to stop this from happening.

Two ways ISA investors may avoid inheritance tax

“I don’t want to give all that money to the government. I’d rather give it to my children”. That’s a pretty common complaint that reflects the views of many investors. So, how can you reduce the bill on your death estate? Here are a couple of ideas based around a product that most long-term stocks and shares investors will have set up – an individual savings account.

IHT: A tax on death

Not content with hitting us for various taxes whilst we are alive, HMRC also come after up to 40% of a “death estate” – the assets we will leave behind when we die. This currently includes the value of Individual Savings Accounts (ISAs). What’s more they usually expect an executor (the person we appoint to carry out the terms of our will) to come up with the money within 6 months of the date of death.

This makes any route whereby we can reduce inheritance tax potentially attractive. What follows is a very brief outline of two opportunities to do just this – to find out more, please contact an Investment Manager or Wealth Planner.

Additional Permitted Subscriptions

A relatively recent rule-change now allows spouses and civil partners to effectively pass on ISA allowances. This is achieved by granting the surviving person an allowance equivalent to the value of ISA-protected assets belonging to the deceased person on death. The allowance is given regardless of whether the assets themselves are left directly to a surviving spouse or civil partner. Needless to say, the exact process needs to be checked carefully to ensure you get it right and be warned that different ISA providers tend to have different approaches.

The obvious problem with the APS is it can only be used by a surviving spouse or civil partner. In order for assets to be left to someone else, other solutions are therefore required. Here is one.

Business Property Relief (BPR)

This is a way to exempt certain qualifying business assets from IHT and it now includes many shares that are traded on the Alternative Investment Market. These are relatively illiquid, higher risk firms so investors need to be aware of the potential threat to their capital before buying. It should also be noted that the BPR qualification criteria are strict (for example, the shares must have been held for at least two years prior to death) and subject to government rule changes. That is why bringing in some help from a specialist makes sense for most investors to maximise the chances this relief works as they expect.

By happy coincidence, quite a few of these BPR shares will also qualify to be held within an ISA, because AIM shares are now ISA-eligible. The potential is therefore clear – combined correctly, an ISA plus BPR could see shares not only held free of income and capital gains tax (ISA) during the lifetime of the account holder but also inheritance tax on the death of that person (BPR). And this time, the assets can be passed on beyond a spouse or civil partner.

What next?

To reiterate, both the APS and the interaction of an ISA with BPR can be fiddly. In both cases, taking advice is something we would recommend.