Do ISAs Avoid Inheritance Tax?

If you want to ensure that your estate pays as little inheritance tax as possible, so you can provide for your loved ones when you are no longer here, there are various tools you can use. Looking at one measure in particular, Prestige Tax and Trust Services asks: do ISAs avoid inheritance tax?

Avoiding inheritance tax

It is a sad fact that life is unpredictable. One day, you may have an accident or fall ill and if this day ever comes, you will want to ensure that your loved ones are provided for financially. This is why inheritance tax can be an issue. If the value of your estate passes a certain point (currently £325,000), it has to pay a 40% inheritance tax on the remaining assets, leaving less cash for your loved ones.

Lucky for you, there are various ways to minimise or outright bypass inheritance tax. One way to do so, for example, is to use trusts to void inheritance tax. If you set up a trust, you no longer legally own the assets held in this vehicle – the trustee, who manages it, does. So these assets do not count towards the value of your estate, making it less likely to eclipse the threshold. But there are other options too.

Introducing you to ISAs

One such tool that you may want to think of taking advantage of here is the Individual Savings Account (ISA). This is a financial product, where you can hold cash, shares etc., without paying tax on the interest, capital gains or dividends. You can use an ISA, therefore, to bump up your savings while you are alive, so when you are no longer here, there is more money available for your loved ones.

These products come in so many shapes and forms – from the popular ‘cash ISA,’ which is a standard savings vehicle, to the lifetime ISA, which is better for long-term saving. Each has its own rules – for example they have different annual savings caps, so it’s critical that you do your due diligence, allowing you to find the right product. Also, while most ISAs are covered by the Financial Services Compensation Scheme – meaning that you can clam back up to £85,000 if the bank goes bust, some are not.

Discussing ISAs and inheritance

So do ISAs avoid inheritance tax? It is a bit complicated. The Telegraph explains that ISAs are included in your estate for inheritance tax purposes. However, you can use what is known as an “additional permitted subscription” (APS) allowance, to pass your ISA onto your spouse or civil partner – retaining their tax-free benefits, when you die, helping you shield your estate from inheritance tax.

If you include an ISA in your estate you can leverage the APS to ensure it raises the value of your estate as little as possible – reducing the likelihood of it owing inheritance tax. You must, however, write a will and state clearly in this document that your ISA should go to your spouse or civil partner. Keep in mind that there are certain criteria for the APS allowance. Your spouse/civil partner must be aged 16 or over and you have to have an ISA in the UK and died on or after 3rd December 2014, to be eligible.

Prestige Tax and Trust Services 

It is really key, therefore, that you write an effective will, if you wish for your ISAs to be used to help your estate avoid inheritance tax. As experts on this subject, we can help. The Prestige Tax and Trust Services team can write the will you need to ensure that your loved ones are always taken care of.

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