Aegon Scottish Equitable is warning advisers to review their clients' investments into PEPs and ISAs amid fears surrounding their IHT treatment.
The firm says the major problem with these types of investment products is while the income is tax-free during an individual’s lifetime, on death they form part of the estate for IHT purposes.
As a result, Aegon suggests tens of thousand of individuals could be at risk, as an individual who has taken their full PEP or ISA allowance since 1987 – when this type of product was first launched – could now have savings of more than £375,000, based on the same growth rate as an average unit trust.
The firm points out this is significantly more than the current £300,000 IHT nil-rate threshold, leading to a 40% tax charge that could have a major and unexpected impact on estate planning, as this excludes the value of any additional assets or property held by the individual.
Margaret Jago, technical manager at Aegon Scottish Equitable, warns many people are not aware that although Peps and ISAs are tax-free they are not exempt from IHT.
As a result, Aegon is urging advisers to review their clients’ investment portfolios and to be aware investing large sums of money into PEPs or ISAs over a long period of time could lead to a tax liability.
However, the firm points out if this is the case it could provide a significant opportunity for advisers to introduce estate planning measures to their clients such as the use of offshore and onshore bonds.
Jago adds: “We believe many individuals will have crept over the current IHT threshold without realising they have done so. While this type of investment is tax free throughout their lifetime, when the investor dies, it becomes part of their estate for IHT purposes.”
The warning follows on from concerns expressed earlier in the year by the Way Group about the IHT dangers for older people using ISAs. The firm launched a ‘Not the ISA’ campaign which encouraged advisers to recommend IHT plans over ISAs for older people – particularly those over 70 - in return for increased commission.
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