ISAs are designed to have two key tax benefits; there is no income tax to pay on any income that is generated from an ISA, whether this is from cash or in stocks and shares, and there is no capital gains tax to be paid on any profits you make from your ISA.
Ian Dyall said:
"These advantages, which previously existed only for the benefit of the ISA holder during their own lifetime, will now be kept in place for the surviving spouse when they inherit the remaining ISA savings.
"But presumably, in many cases, if the first spouse has just died the remaining spouse is likely to be elderly themselves. Many elderly people hold their investment portfolios until death, at which point capital gains are exempt from being taxed anyway."
Furthermore, the income tax benefits on dividends from individual equity ISAs are not a benefit for basic rate taxpayers, as they would have no tax liabilities on the dividends they receive during their remaining retirement anyway. Only higher-rate taxpayers would be subject to extra tax and therefore will derive some benefit from this announcement, and even then they will only make a 22.5% saving on the additional income that has been generated by receiving the savings in the ISA.
Far more than income tax, a bigger concern to many elderly people is inheritance tax. There may now be a level of exemptions from income tax and capital gains tax by ISAs, but they are not exempt from inheritance tax. Many of the solutions that are offered to mitigate an eventual inheritance tax bill involve gifting to others through the use of trusts – and ISAs cannot be held in trust.
Dyall added:
"People therefore shouldn’t necessarily fall into the trap of considering ISAs as the best vehicle for passing on their wealth. The 22.5% that will be saved in income tax as a result of the Chancellor’s announcement would be usurped for many by the 40% potential tax savings on offer by bundling some capital into a trust, for example.
"Clearly money that is in your ISA is going to be more accessible to you during your own lifetime, but if you are looking to lock money away for the benefit of your spouse and/or future generations, there could be much better tax-efficient financial tools on offer.
"If you have a potential inheritance tax liability, then taking advice and taking it early is the key to mitigating this future tax bill where possible."
