The UK's Inheritance tax (IHT) system has been described as "particularly complex" by chancellor Phillip Hammond recently. According to research by Octopus investments, most people agree with him, with few people understanding the relationship between ISAs (Individual Savings Accounts) and IHT.
54% of people did not know whether ISAs were exempt from IHT and 21% assumed (incorrectly) that ISAs do not count towards death duties. 25% of those surveyed correctly answered that ISAs do count towards the deceased's taxable estate, therefore making them subject to IHT.
However, if there is a surviving spouse, then this does not apply.
Paul Latham of Octopus investments draws attention to the fact that IHT issues do not affect the very wealthy exclusively, as many middle income families have been on the receiving end of IHT liabilities due to rises in property values. This has led to the residence nil rate band (RNRB).
The RNRB will combine with the existing £325,000 allowance to allow couples with a home to pass on up to £1 million to direct family members only, free of IHT, starting in 2020.
Paul Latham says:
"With more people set to be liable for inheritance tax each year, it’s clear more needs to be done to educate and raise awareness".
Chancellor Phillip Hammond has suggested that the upcoming review of IHT will focus on the technical, administrative and practical issues regarding estate planning and disclosure.
The pension freedoms initiative has changed the relationship between pensions and ISAs at death. It's now more tax efficient to pass pensions (as long as they are defined contribution) on than ISAs, meaning that the pension should be the last thing to be drawn upon from an IHT perspective.
Defined benefit pensions however, are dependent on there being a surviving spouse. If not, these benefits generally cease.
Westminster Wealth Management is able to assist in putting your personal finances in order, ensuring that your money goes towards building wealth for the future. Contact us today.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Brush up on the basics to avoid inheritance tax bill