As investors look to make their annual investment into an ISA how do the various personal taxes apply to the schemes?
Well, investors can receive any income generated by the ISA tax free, and any gains on buying and selling investments within an ISA are also free of capital gains tax.
But what about Inheritance tax when someone passes away? Is your ISA ‘pot’ tax free from IHT if you leave it your spouse, or pass it on to your children?
IHT survived – as did most personal taxes – any real budgetary impact. But savers and investors should not be complacent.
“Nothing in the budget today stops IHT mitigation as we know it. We can still make large tax-free gifts, transfer assets into trust and opt to pay the lower rate of CGT on any gains rather than suffer the death rate of 40% IHT. As predicted, the big overhaul for CGT and IHT is yet to come.”
However, she reminds us that the recommendations in the All Parties Parliamentary Report of January 2020 were radical with the introduction of a ‘gift tax’ and dispensing with Capital Gains Tax uplift on death.
“Such changes would mean it is virtually impossible to pass on wealth without suffering tax.
All indications are that more drastic changes are afoot but not quite yet. The moral of the story is to get your house in order and make the most of ‘potentially exempt transfers’ (tax free gifting) while you still can.”
Kay Ingram, chartered financial planner and director of public policy at financial planners LEBC agrees: “The success of the Chancellor’s balancing act depends upon the impact of vaccination on the ability of the economy to fully reopen in the Summer, for businesses to make profits, giving a rising corporation tax take from 2023,” Ingram outlined, “Should that be derailed, tougher personal tax measures, as rumoured before this Budget, and set out by the Office for Tax Simplification, may be brought forward. While we may hope that won’t be necessary, taking the opportunity to plan family finances within current tax rules and allowances would be prudent.”
Individuals may need to employ more strategies and use a wider variety of savings vehicles to help their money maintain its net of tax buying power. That may mean using some of the allowances and reliefs which have perhaps been neglected during two decades of relatively low taxation.
This could include:
Stripping growth out of taxable investments on an annual basis so that the £12,300 capital gains tax allowance is used each year;
- Reinvesting gains in tax exempt Individual Savings Accounts and pensions;
- Making regular pension savings to reduce the income tax payable;
- Making lifetime gifts to family members within the annual exempt amount or taking advantage of the more generous exemption for gifts out of surplus income;
- Making larger capital gifts as potentially exempt transfers, which after seven years fall outside of the taxable estate;
- Exploring the use of other family members allowances and reliefs and changing ownership of assets to lower taxpayers;
- Creating a retirement planning strategy which makes use of a variety of investment vehicles to provide a retirement income, and
- Planning the distribution of your estate with the help of wills, life assurance and assets which offer inheritance tax exemptions and reliefs.
We also asked him if investors who have only a small amount to invest whether they should put it into an ISA or their pension, and with savings rates so low is there any point having a cash ISA?
And for children or grandchildren under the age of 18 how do you decide what’s best a Junior ISA (JISA), setting a pension or another form of saving such as a friendly society bond?
Watch our short video below and find out the answers to these questions.
Further reading: ISAs: and investment guide