Octopus Investments Reading time: 4 mins

Brits could be sleepwalking into an inheritance tax nightmare.

28 Feb 2018

Research by Octopus Investments has raised concerns that few people understand the rules around ISAs and inheritance tax.

From a survey of UK adults1, over half (54%) of respondents said they did not know whether ISAs are exempt from inheritance tax (IHT), while a fifth (21%) incorrectly believe they are. Only a quarter (25%) of those surveyed knew that Isa savings can form part of a person’s taxable estate and therefore could also be subject to inheritance tax.

The findings also show that this lack of awareness and understanding is prevalent across all age groups. Of those aged 55 and over, just over a quarter (28%) said they know that ISAs are not exempt from inheritance tax, while not a dissimilar number (18%) of 18 to 34-year-olds know this.

The extent that people misunderstand the rules around IHT and ISAs may also not be realised by some financial advisers. In a parallel survey, Octopus Investments reveals three-fifths (59%) of financial advisers say that their clients are aware of the rules and realise that ISAs are taxable ‘on death’2.

Paul Latham, Managing Director of Octopus Investments, said:

“It’s concerning that unsuspecting families could face a large tax bill because they don’t know the rules around ISAs and IHT. What is more, this is not just a problem for the super-wealthy. Despite efforts to increase the current threshold, we still expect to see a rise in the number of estates subject to inheritance tax, particularly in London where the average property price currently stands at £484,0003.

“With more people set to be liable for inheritance tax each year, it’s clear more needs to be done to educate and raise awareness.

“There are a number of options now available to those who currently have a stocks and shares ISA and who wish to pass on as much of it as possible to their children.

“One of these options includes investing in AIM listed shares. Clearly AIM listed shares are only for those who can get comfortable with the risks of smaller company investing. AIM shares could fall or rise in value more than shares listed on the Main Market of the London Stock Exchange and they can be harder to sell.

“The change to the ISA rules in 2013 that allowed AIM listed shares to be held within an ISA for the first time has been very popular with investors, and has encouraged more people to consider the opportunities that AIM listed companies can offer.   

“Investors who are happy to take more risk with their ISAs have been able to diversify into AIM listed stocks. AIM is home to a range of diverse businesses and certain AIM companies also 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 are free from IHT as long as they been owned for at least two years at the time of death. This relief allows people to leave their ISAs that have invested in AIM qualifying shares for more than two years to their beneficiaries free from inheritance tax.  

“Many forms of inheritance tax planning put money permanently out of an investor’s reach and require the lifetime tax benefits of ISA savings to be sacrificed in the process. This lack of access can make it more difficult to deal with any unexpected costs that come up in later life. By transferring a stocks and shares ISA to an ISA wrapper which holds a portfolio of listed AIM companies, investors can reduce their tax liabilities without locking away their money for the long term and continuing to benefit from the benefits of the ISA wrapper.

“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 we have a team of professional fund managers working on behalf of our clients wanting 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.” 

 – Ends –

Notes to editors:

  1. Opinium carried out an online survey of over 2000 UK adults from 28 December 2017 to 2 January 2018
  2. Octopus Investments carried out an online survey of nearly 600 UK advisers from 20 December 2017 to 10 January 2018.
  3. House Price Index by the Office of National Statistics covering December 2017

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 may record telephone calls to help improve our customer service. Issued: February 2018.