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16 million UK adults unaware of ISA inheritance rules

24 Feb 2020

Research by Octopus Investments reveals a concerning number of UK adults are not familiar with inheritance tax (IHT) rules relating to ISAs, despite plans to pass on their savings to the next generation.

Four in five (79%) savers are unaware that ISAs are subject to IHT, while HMRC data1 indicates that 41% of UK adults hold an ISA. This equates to as many as 16.9 million adults in the UK2  who aren’t aware of the current IHT status of their ISA.

Almost two thirds (64%) of UK savers said they did not know whether ISAs are exempt from IHT, while 15% incorrectly believe they are.

Only a fifth (21%) of the 4000 UK adults surveyed knew that ISA savings can form part of a person’s taxable estate and therefore could also be subject to IHT.

Octopus’ research found that mixed understanding and a lack of preparation for passing on wealth is particularly problematic for those in the later years of their retirement.

It was revealed that those over the age of 75 hold almost a third (29%) of their entire wealth in ISAs, and almost a quarter of this same age group are planning to pass their ISA to the next generation –  worryingly increasing their potential exposure to IHT.

Some of the savvier savers – those who have a better understanding of the IHT rules around ISAs, are planning to mitigate their IHT bill. A third plan to gift the wealth in their ISA to family or friends before they pass away. In order to mitigate IHT in this way, the gift needs to be made more than seven years before death.

Paul Latham, Managing Director at Octopus Investments, said:

“Contrary to popular belief, inheritance tax doesn’t just concern the super-wealthy. The number of estates subject to inheritance tax has been on the rise over recent years – not least because of climbing property prices in the UK.

Many people have worked hard and saved prudently all their lives, often with the aim of passing on that wealth to their loved ones. But if you aren’t aware of the rules around ISAs and IHT, you could be stung with an unexpected bill. It’s a bit like putting money away into a piggy bank for years and years, giving it to your children as a gift, only to find it had a big inheritance tax shaped hole in it, and almost half of it is already gone.”

“It’s clear that more needs to be done to educate people and raise awareness on the financial planning options available to people.”

There are a number of choices available to those who currently have an ISA and wish to pass on as much of it as possible to their children:

  1. Gifting – if you pass down gifts of up to £3000 a year to your children or grandchildren at least 7 years before you pass away these are IHT free. You can also give up to £5000 for a wedding of a family member. But with gifting you do lose access to the assets straight away.

  2. Using trusts – When you put money or property in a trust, provided certain conditions are satisfied, you don’t own it any more. This means it might not count towards your IHT bill when you die.

  3. Investing in AIM listed shares – The change to the ISA rules in 2013 meant that AIM listed shares could be held within an ISA. Investing in certain AIM listed shares means people can reduce their tax liabilities without giving away their wealth during their lifetime. Certain AIM companies qualify for Business Property Relief (BPR), an investment incentive which has been part of primary inheritance tax legislation since 1976. Shares that qualify for BPR can be left free from IHT as long as they have been owned for at least two years at the time of death. BPR exists to encourage investors happy to take on more risk to invest in smaller companies supporting UK growth. 

Paul Latham added:

“The good news is that through investing in AIM listed shares within an ISA wrapper investors who are happy to take more risk with their wealth can retain the lifetime tax benefits of the ISA pot that they have built up for years whilst also undertaking estate planning.

“However, investors need to be mindful that the tax reliefs are dependent on the investment maintaining its qualifying status and their portfolio therefore needs to be actively managed, which is why it’s important to seek professional advice if you want to invest in BPR qualifying shares. Investors also need to recognise that their own individual circumstances and legislation may change in the future, which affects the tax reliefs.” 


Notes to editors:

Opinium carried out an online survey of over 4000 UK adults from 28 January 2020 to 31 January 2020

1) HMRC ISA Statistics Release – April 2019.

2) ONS National population projections – October 2019 – estimates calculate that there are 52.4 million adults in the UK.

*Investing in AIM means investing in smaller companies, where the shares can be harder to sell, and they could fall or rise in value more than shares listed on the Main Market of the London Stock Exchange.

For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on the portfolio companies maintaining their qualifying status. The shares of the smaller companies we invest in could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. We record telephone calls. Issued: February 2020.