He may be a great supporter of government initiatives to encourage investment but, each time he puts money in an ISA himself, Paul Wilcox is only too aware of the potential price his family may pay for this privilege
Once again the ‘ISA season' is just around the corner and, in common with many investors I will shortly be making that difficult decision as to whether to put more money into ISAs. Or not.
With all the benefits of ISAs and the increasing flexibility of this much-heralded ‘tax-efficient' form of investing, you may wonder why the dilemma. Well, while I am a great supporter of government initiatives to encourage investment, I am only too aware of the potential price my family may pay for this privilege.
What price? The 40% in inheritance tax (IHT) when my estate passes to my family, of course. So, the tax breaks on ISA investing are terrific, if you need them and benefit from them - which does not apply to all ISA holders, some of whom are neither higher-rate taxpayers nor likely to pay capital gains tax. But what of this potential sting in the tail with IHT?
Last month's statistics from HMRC on both ISA investment and the impact of IHT underlines exactly what - if one thinks about the logic of what we all know about demographics. The largest group to invest in ISAs is the same group that pays the most IHT.
This group, the silver surfers - people like me approaching God's waiting room (no, not Eastbourne just maturity) - are the ones dying and suffering yet another government tax raid, this time in the form of a 40% hit to the estate on all wealth above the current £325,000 IHT threshold (or £650,000 for a married couple so long as the first person to die leaves their entire estate to their partner).
We also all know the amount collected from IHT has generally been increasing year on year. In fact, according to HMRC statistics, in the most recent tax year for which figures are available (2014/15) IHT receipts rose by some 22% - increasing to £4.6bn and so almost doubling the take in the six-year period since 2009/10 when £2.4bn was collected.
This is not a huge sum in the context of government finances but the impact on many families is completely disproportionate - especially those living in areas of high property prices. Never mind the imminent initiatives on ‘marginal' extra allowances for residential property, which do not even properly compensate for lagging allowances compared with rising property prices.
Alternative tax breaks
My personal views on the morality of this tax are not controversial - I am in favour of equitable taxes but not the double taxation suffered in creating financial security for one's family - and so this leads me on to thoughts of seeking alternative tax breaks, other than those which relate to straightforward ISAs.
I mention the concept of ‘straightforward' ISAs because the government has recently introduced a very useful innovation in the form of AIM (Alternative Investment Market) ISAs.
Allowing investors to combine IHT breaks with the benefits accruing to ISAs is a great step forward. But - and it is a big ‘but' - there is a risk investors will skew their portfolios far too much towards this higher-risk investment sector. All of these issues remind me of the old adviser adage - that investors should be careful not to let ‘the tax tail wag the investment dog'.
Having questioned further investment into ISAs for certain ‘wealthy' investors, it is certainly worth considering the benefits to this group of their cumulative ISA investment on their family legacies. According to The WAY Group's own statistics, having crunched the numbers on more than 1,000 flexible trusts, the average age of investors seeking to achieve the flexibility and protective benefits of making gifts into such arrangements - think the recently departed Duke of Westminster here - is around 70 years of age.
With current life expectations, that gives them the ability to use their nil-rate band for IHT purposes three times over … providing they get going now. Gifts within the nil-rate band fall out of account after seven years, so the allowance can be reused every seven years.
At age 70, that means three times. To use this allowance, however, gifts into suitable trusts represent a potentially taxable event when funds are realised from elsewhere - unless they are realised from accumulated ISAs which are, of course, free of capital gains tax.
Food for thought when it comes to advising clients on their annual Isa investment.
Paul Wilcox is chairman of The WAY Group
Retired in 2014
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