Inheritance Tax and ISAs: Some Key Questions Answered by the experts here at easyMoney

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The taxman cometh – or does he? 

Let’s talk about death and taxes. Not a cheerful subject, and although it’s a dreadful cliché, these two things really are the only certainties in life.

Whilst tax is part of our everyday experience and is an accepted reality, especially after our much-anticipated Budget statements, death is a little bit more taboo. Or so it seems. 

Have you drawn up a will?

Related to this subject, in our opinion, many of us are squeamish about having honest discussions and taking action to make provision for our families. In fact, research bears this out. Statistics published by Canada Life in 2020 revealed that an eye-watering 59 per cent of UK adults haven’t even written a will.  

This means that about 31 million haven’t made legal provision for where and to whom they would wish their homes and other assets to go when they die. That’s an awful lot of families in grief potentially facing some complicated hurdles to get over; extra stress at a stressful time. 

It shouldn’t be this way, in our opinion.  

Thirty-one million UK adults don't have a will in place, says new research

(Although we’re not involved in will writing, we think it’s a good idea to get the right advice in this specialist area.)

Questions and concerns about inheritance tax (IHT) and ISAs are common search terms in Google, so if you’re wondering how this works, read on. 

In this blog, we’re aiming to cut through what you may perceive as an IHT fog and in particular its relevance to ISAs. Also, to explore whether you can pass on your pension and any lump sums you may be considering gifting to your loved ones upon your death. 

A quick introduction to IHT

You pay inheritance tax as a sum to HMRC (after-tax allowance deductions) when you die.  

40% of the value of an estate – that’s property and all other assets – worth more than £325,000 for a single unmarried person needs to be paid to the government.

However, there’s a bit of leeway here.  Thanks to an additional allowance introduced in April 2017 and implemented in stages, couples can now leave property worth up to £1m before paying any tax.

 How does this work?

There’s also something called a residence nil-rate band.  If you’re passing on your main home, there’s an extra allowance that enables you to leave your property to your family tax-free; this is £175,000 in the current tax year

Note: your spouse or civil partner has the same additional allowance, thus doubling what you can pass on to £350,000.  Thus, this with the afore-mentioned property allowance for the two of you adds up to as much as £500,000 tax-free for an individual, or £1million as a couple – as we’ve mentioned.

But, not everyone can qualify for the full allowance, so do be aware of that. 

There are several things to consider in addition: tax allowances, tax years, your marital status, as well as differences in property and asset values.

The tax lowdown on ISAs during and after your lifetime

One of the benefits of an ISA, and in our view an IFISA in particular (easyMoney’s focus), is that it is completely free of income tax whilst you are alive.  

Should you invest funds via easyMoney’s P2P lending platform, any interest you receive on the loans you make to, in this case, property professionals, will not be subject to taxation. None at all. Is this valuable news? Yes, with a target rate between 3.67 and 8% p.a., the returns could be unquestionably good. And, they’re paid monthly, offering you the chance to re-invest or draw down the money. 

Happily, if you leave your ISA to your surviving spouse or civil partner, the tax-free status crosses over to them.  Further, your other half will be entitled to an additional ISA allowance equal to the value of yours at the time of your death.

Another positive: when you die, your ISA is still free of income tax during the administration of your estate, or 3 years after you have died, whichever comes first. 

But, should you pass it to anyone else, it will be liable to tax, in line with the current legislation regarding IHT in general.

What about tax on an inherited pension, or on an inherited lump sum?

We’ll aim to simplify things as much as possible. Do bear in mind, however, that you should take specialist pensions advice. 

The good news is that unlike savings in cash, pensions sit outside your estate, and won’t count towards the IHT threshold after death. However, as the saying goes – conditions apply.  For example, how old you are when you die and the type of pension you have.

If you have a defined contribution pension (the one you pay into), and you die before you reach 75, and you’ve not touched it, your beneficiaries can claim your entire pot tax-free.  If you’re older than 75, they’ll have to pay income tax at their usual rate. 

Regarding a lump sum, should you pass away before aged 75, and you’ve already started drawing down your pension, those to whom you’re passing on your estate could access your pot as a single amount tax-free. Or, they could purchase a tax-free annuity.  This payment should be “discretionary”, which means that the pension provider can choose whether to pay it to a named beneficiary. 

If you have a defined benefit pension (in other words a final salary pension), it could be harder to pass this on if you die under the age of 75.  Over this age, and they will receive some of it, but it will be subject to tax.

By the way, regarding your state pension, your wife/husband or civil partner may be able to benefit from some of your State pension entitlements, depending on specific circumstances.

Beware…

By the way, don’t make the mistake of thinking that you can simply give away your assets during your lifetime. Financial gifts to your loved ones COULD be subject to a retrospective tax bill if you live for seven more years after they receive it.   

Tax, so the saying goes can be taxing and like everything in life, knowing where you stand now could save hassle and stress for your family when you are no longer here.

We hope that being able to pass on your Innovative Finance ISA (IFISA) to your spouse tax-free makes investing in peer-to-peer lending courtesy of easyMoney an interesting prospect, and one that may be keen to explore further.  You don’t have to be an expert in financial matters to join the easyMoney family, and you could be helping your wife, husband or civil partner to benefit from an extra income after you die.

Click here to find out more 

One less thing to worry about, and some financial peace of mind for your loved one.

easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.

easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.