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ISAs and IHT

Practical Issues
Bouleversee
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ISAs and IHT

#400041

Postby Bouleversee » March 29th, 2021, 12:36 pm

Trying to reduce the amount of accumulated bumf in my office, including various newspaper articles cut out to digest/act on later, which never happened due to my husband's long illness and death, I came across a lengthy one headed "Unification of pensions and ISAs" in The Times dated April 13, 2015, from Ian King who was at that time business presenter for Sky News. It included the following: "Mr Osborne also has made both ISAs and unused pension savings free from inheritance tax." News to me, as regards ISAs. Indeed I complained to my MP some time ago about the unfairness of this, especially since pension contributions get tax relief whereas ISA contributions don't. I can't remember if I got any reply but I certainly wasn't told I was talking rubbish and I feel sure this is not the case, though it is an extraordinary statement to make if not true. How I wish it were!

I'm surprised more people are not making a fuss about the disparity.

Bouleversee
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Re: ISAs and IHT

#400050

Postby Bouleversee » March 29th, 2021, 12:56 pm

Snorvey wrote:...but there are significant restrictions in accessing your pension (before age 55). And tax too - particularly, say, if you have 100k and you want to access the cash.

Additional permitted subscription allows a transfer of a deceased persons ISA to a spouse. After that, who cares?


I do. I don't have a pension fund I can leave to needy children and grandchildren.

swill453
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Re: ISAs and IHT

#400058

Postby swill453 » March 29th, 2021, 1:13 pm

Why should ISAs be treated any more generously than other savings and investments as far as IHT is concerned? They already have the Income Tax and Capital Gains Tax advantages.

Scott.

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Re: ISAs and IHT

#400059

Postby Lootman » March 29th, 2021, 1:17 pm

Bouleversee wrote:It included the following: "Mr Osborne also has made both ISAs and unused pension savings free from inheritance tax."

Other than the spousal transfer ability already mentioned, which really only defers the problem, I have no idea what Mr King meant either.

The only way I know of that an ISA can be IHT-free is to invest it only in qualifying AIM shares, which few people would want to put 100% of their nestegg in.

In fact not only do ISAs have no real IHT benefits, but as long as you keep your assets in ISAs you cannot take other steps to protect that worth from IHT, such as gifts, charitable donations or simply frittering it away. The ISA tax breaks are great whilst you are alive but the government makes hay when you die, potentially taking 40% of your ISA pot. Also, gains that would have been stepped up upon your death in a taxable account, receive no such benefit in an ISA.

It is for that reason that, after 34 years of fully contributing to PEPs/ISAs and carefully ensuring that I never withdraw anything from them, I am considering starting to draw my ISA down. I have probably already had most of the tax benefits I am ever going to have from ISAs. The idea of tax-free withdrawals is starting to appeal, even without the opportunities it gives me to mitigate IHT. It also helps protect me against any future negative changes to ISA rules.

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Re: ISAs and IHT

#400064

Postby Dod101 » March 29th, 2021, 1:46 pm

There certainly is not a great benefit in not drawing on ISAs. I take most of the dividends out each year and nowadays pay very little income tax indeed. I have occasionally extracted capital but not very often.

As for making them IHT free I doubt that that will ever come about. The only reason that a SIPP is free of IHT is not because some chancellor decided that that would be a good idea, but simply that, the way our pensions are organised, they are held by pension trustees and are therefore not part of our estates. On the general subject of IHT, the regime is complicated but really quite generous, now that we can use a deceased spouses unused allowances and the main residence allowance.

Dod

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Re: ISAs and IHT

#400079

Postby Lootman » March 29th, 2021, 2:32 pm

swill453 wrote:Why should ISAs be treated any more generously than other savings and investments as far as IHT is concerned? They already have the Income Tax and Capital Gains Tax advantages.

That is fine except that ISAs are often described by promoters and commentators as tax-free and that is not true. They are something of a trap because they seduce you into holding them forever and then the government quite possibly collects more in IHT than had previously been saved on income tax and CGT.

Dod101 wrote:On the general subject of IHT, the regime is complicated but really quite generous, now that we can use a deceased spouses unused allowances and the main residence allowance.

For me anyway it is not just about the rate of tax, or even the amount of tax. It is also about the type of tax and what it says politically.

So I deeply resent IHT because it is essentially a tax on dying. It punishes the family of anyone who dies, both financially and in terms of often creating a lot of work and stress for them. I consider it heartless and confiscatory.

The other tax I hate is council tax which, again, is a tax on assets rather than on transactions.

On the other hand I have no real problem with VAT, income tax or capital gains tax, even though they cost me more.

I might be unusual in that regard, but that is how I feel and it informs the decisions I make, and will make.

Charlottesquare
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Re: ISAs and IHT

#400094

Postby Charlottesquare » March 29th, 2021, 3:25 pm

Lootman wrote:
swill453 wrote:Why should ISAs be treated any more generously than other savings and investments as far as IHT is concerned? They already have the Income Tax and Capital Gains Tax advantages.

That is fine except that ISAs are often described by promoters and commentators as tax-free and that is not true. They are something of a trap because they seduce you into holding them forever and then the government quite possibly collects more in IHT than had previously been saved on income tax and CGT.

Dod101 wrote:On the general subject of IHT, the regime is complicated but really quite generous, now that we can use a deceased spouses unused allowances and the main residence allowance.

For me anyway it is not just about the rate of tax, or even the amount of tax. It is also about the type of tax and what it says politically.

So I deeply resent IHT because it is essentially a tax on dying. It punishes the family of anyone who dies, both financially and in terms of often creating a lot of work and stress for them. I consider it heartless and confiscatory.

The other tax I hate is council tax which, again, is a tax on assets rather than on transactions.

On the other hand I have no real problem with VAT, income tax or capital gains tax, even though they cost me more.

I might be unusual in that regard, but that is how I feel and it informs the decisions I make, and will make.


So, we scrap IHT and bring in CGT at second death to include one's PPR and tax sales of same throughout life (with a holdover provision when upsizing), I suspect most people, now with no joint effective threshold at circa £1million, would be worse off. Good for HMG though.

Adamski
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Re: ISAs and IHT

#400099

Postby Adamski » March 29th, 2021, 3:49 pm

I believe it's because in 2015 George Osborne and Cameron reformed inheritance tax, so many middle class families would stop paying it.

For a family the combined allowances, including in property, rise to £1m. This overall threshold includes ISA's which are part of the estate. As mentioned above pensions are outside of IHT but the reforms lowered the tax on inherited pensions substantially as well.

PinkDalek
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Re: ISAs and IHT

#400103

Postby PinkDalek » March 29th, 2021, 3:54 pm

Bouleversee wrote:... I came across a lengthy one headed "Unification of pensions and ISAs" in The Times dated April 13, 2015, from Ian King who was at that time business presenter for Sky News. It included the following: "Mr Osborne also has made both ISAs and unused pension savings free from inheritance tax." News to me, as regards ISAs. ...


Not having read the article but the date would indicate they may have been talking of the following (which I recall you discussed at some time after your husband's decease in that it wouldn't benefit your family or maybe I'm mixing it up with another change ***):

ISAs: transfer of benefits to surviving spouse or civil partner upon death
Amendments to the Individual Savings Accounts (ISA) rules to allow the surviving spouse or civil partner to benefit from an additional ISA allowance. - Published:27 March 2015

https://www.gov.uk/government/publications/isas-transfer-of-benefits-to-surviving-spouse-or-civil-partner-upon-death


*** More likely the Residence Nil-Rate Band which was announced Summer 2015 but wouldn't start to take effect until later:

Inheritance Tax additional threshold/residence nil rate band - from 6 April 2017
https://www.gov.uk/government/publications/rates-and-allowances-inheritance-tax-thresholds-and-interest-rates/inheritance-tax-thresholds-and-interest-rates#inheritance-tax-additional-thresholdresidence-nil-rate-band---from-6-april-2017

swill453
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Re: ISAs and IHT

#400113

Postby swill453 » March 29th, 2021, 4:16 pm

PinkDalek wrote:Not having read the article but the date would indicate they may have been talking of the following (which I recall you discussed at some time after your husband's decease in that it wouldn't benefit your family or maybe I'm mixing it up with another change ***):

ISAs: transfer of benefits to surviving spouse or civil partner upon death
Amendments to the Individual Savings Accounts (ISA) rules to allow the surviving spouse or civil partner to benefit from an additional ISA allowance. - Published:27 March 2015

https://www.gov.uk/government/publications/isas-transfer-of-benefits-to-surviving-spouse-or-civil-partner-upon-death

That's not really anything to do with inheritance tax though. Surviving spouses could always inherit free of IHT.

All that change does is preserve the ISA status.

Scott.

Dod101
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Re: ISAs and IHT

#400118

Postby Dod101 » March 29th, 2021, 4:24 pm

Thanks Snorvey. I have asked. A further point re IHT is of course if you leave at least 10% of your chargeable estate to a charity/charities you can reduce the charge to 36% from 40%. I think in all that the IHT regime is far from particularly onerous. I would rather my heirs lose a bit than pay more income tax now.

Dod

PinkDalek
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Re: ISAs and IHT

#400119

Postby PinkDalek » March 29th, 2021, 4:34 pm

swill453 wrote:
PinkDalek wrote:Not having read the article but the date would indicate they may have been talking of the following (which I recall you discussed at some time after your husband's decease in that it wouldn't benefit your family or maybe I'm mixing it up with another change ***):

ISAs: transfer of benefits to surviving spouse or civil partner upon death
Amendments to the Individual Savings Accounts (ISA) rules to allow the surviving spouse or civil partner to benefit from an additional ISA allowance. - Published:27 March 2015

https://www.gov.uk/government/publications/isas-transfer-of-benefits-to-surviving-spouse-or-civil-partner-upon-death

That's not really anything to do with inheritance tax though. Surviving spouses could always inherit free of IHT.

All that change does is preserve the ISA status.

Scott.


Well I could have deleted the first part (once I’d located the second part) & left in the *** part only about IHT which you didn’t quote but there you go.

swill453
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Re: ISAs and IHT

#400121

Postby swill453 » March 29th, 2021, 4:35 pm

I fully intend to minimise IHT by spending (or giving away) before I die. I've just looked over the accounts of my aunt and uncle's estate. In their later years they lived very simply and didn't, for example, spend money on mobility aids and other help that would have prevented my uncle being housebound for the last 8 years of his life.

The estate just paid £175,000 in IHT, and over £30,000 in Capital Gains Tax (because the house increased in value when the sale was delayed due to Covid).

Scott.

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Re: ISAs and IHT

#400122

Postby swill453 » March 29th, 2021, 4:37 pm

PinkDalek wrote:Well I could have deleted the first part (once I’d located the second part) & left in the *** part only about IHT which you didn’t quote but there you go.

I left it out because it wasn't about ISAs, but sorry if you think I misrepresented you.

Scott.

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Re: ISAs and IHT

#400135

Postby scrumpyjack » March 29th, 2021, 5:29 pm

The unfairness of IHT is that certain assets are excluded from it, eg farms and some company shares, so the rest of us end up paying a much higher rate to subsidise those not paying it. I think a parliamentary group recommended getting rid of all the holes in it and having a 10% rate instead.

As for ISAs they can more easily be passed on the spouse now, but also even if there is no spouse the executors can, if they wish and if the beneficiaries are happy to do so, leave it running for up to 3 years and any income or gains in that period are tax free.

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Re: ISAs and IHT

#400140

Postby XFool » March 29th, 2021, 5:46 pm

Bouleversee wrote:Indeed I complained to my MP some time ago about the unfairness of this, especially since pension contributions get tax relief whereas ISA contributions don't.

Why should contributions to ISAs get "tax relief"? ISAs are generally funded from income, which is taxed. Pensions are funded with money not then available as income, so not taxed as such.

Already, income taken from ISAs isn't taxed, income from a pension is taxed.
Last edited by XFool on March 29th, 2021, 5:53 pm, edited 2 times in total.

PinkDalek
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Re: ISAs and IHT

#400141

Postby PinkDalek » March 29th, 2021, 5:48 pm

swill453 wrote:
PinkDalek wrote:Well I could have deleted the first part (once I’d located the second part) & left in the *** part only about IHT which you didn’t quote but there you go.

I left it out because it wasn't about ISAs, but sorry if you think I misrepresented you.


Not at all and you are more than likely correct on both fronts as I'm having a bad day!

Have you or anyone else got an idea what the article said (I don't have a subscription)?:

Unification of pensions and Isas could brew up a heady TEE
https://www.thetimes.co.uk/article/unification-of-pensions-and-isas-could-brew-up-a-heady-tee-27xr2t3kmw3

Maybe this explains:

Why the industry fears 'ISA pensions'
https://www.professionalpensions.com/news-analysis/1004750/-industry-fearful-isa-taxation-pensions

I've only glanced at the latter which appears to be about another Consultation from the dim and distant.

At least I now know:

EET = Exempt, Exempt, Taxed - model
TEE = Taxed, Exempt, Exempt - model

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Re: ISAs and IHT

#400142

Postby XFool » March 29th, 2021, 5:51 pm

...Oh, wasn't this all being discussed (speculated about) a budget or so ago? I don't think anything came of it. (Apart possibly from the LISA)

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Re: ISAs and IHT

#400148

Postby Lootman » March 29th, 2021, 6:28 pm

Charlottesquare wrote:So, we scrap IHT and bring in CGT at second death to include one's PPR and tax sales of same throughout life (with a holdover provision when upsizing), I suspect most people, now with no joint effective threshold at circa £1million, would be worse off. Good for HMG though.

Taxing lifetime PPR sales would smack of retrospective taxation, which governments generally avoid doing. People make decisions based on the tax laws at the time. If a transaction is tax-free under current law, the prevailing assumption is that it will not be retrospectively taxed years or decades later. Indeed, people do not generally keep records for tax purposes of events from the distant past for that reason.

So if you made such a change it could only be on a "going forward" basis, with prior realised gains grandfathered into the old CGT-free rule, in my view.

Whether I would trade IHT for paying CGT on all unrealised gains upon my death would of course depend on the numbers. But getting back to ISAs, I would generally take the view that one's estate can be more easily reduced and finessed via a tax-free liquidation of an ISA, than by paying a shed load of CGT on taxable assets of the same value.

So I prefer to take my chances with the current system.

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Re: ISAs and IHT

#400192

Postby ursaminortaur » March 29th, 2021, 9:35 pm

XFool wrote:...Oh, wasn't this all being discussed (speculated about) a budget or so ago? I don't think anything came of it. (Apart possibly from the LISA)


Yes this consultation in 2015 led to the introduction of the Lifetime ISA in the 2016 budget. At the time this was seen as Osborne's first step in transforming pensions into ISAs with it being thought that he would later try to incorporate other "pension features" such as employer contributions. However with May's election and the replacement of Osborne by Philip Hammond the idea of further improvements to the Lifetime ISA which would have made it into a full pension replacement disappeared and there currently appear to be no plans to resurrect the idea.


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