Here’s an interesting fact...
If you had taken advantage of tax free investments (Personal Equity Plans (PEPs) and Individual Savings Accounts ( ISAs)) and maximised your investment by using each tax year’s allowance since they were introduced in 1987, you would have invested £212,080 over that time. If you had received an average growth rate of 7% per annum since 1987, then your investment would now be worth around £578,473. If you are married, or in a Civil Partnership and have both ‘maxed out’, then the total would be £1,159,460 which would make you...
Good news indeed, but let’s just explore ‘Tax Free’. It is absolutely true that monies accumulated within an ISA wrapper are free of Income Tax and Capital Gains Tax, which make them an excellent planning tool whilst you are accumulating your wealth. Withdrawals, whether regular or ad hoc, are tax free also. Unfortunately there is a tax that ISA’s do not escape; Inheritance Tax (IHT), as the value of any monies held in ISA’s are potentially subject to IHT at a rate of 40% on death, a fact that not everyone is aware of.
If you are a regular reader of our Blogs, you will know that if you are single, IHT is potentially payable at 40% on assets in excess of £325,000, on death, called the Nil Rate Band. If you are married or in a Civil Partnership, you can utilise a Joint Nil Rate Band of £650,000.
If we assume that your joint ISA holding is valued at £1,159,460 you own your own home, and it is valued at the recently published average value of £186,512, then not taking any other asset into account, your joint Estate would be valued at circa £1,345,972. If we then utilise a Joint Nil Rate Band of £650,000, then the tax payable on the balance would equate to £278,388 had you both died yesterday, yes, £278,388.
If the prospect of your Estate paying a sizeable tax charge, on what you anticipated were tax free monies concerns you, or you would like to talk to us about any other area of Financial Planning, please feel free to contact us.
To read about Martin and Sally's case study on inheritance tax click here