A good budget statement for savers

Last week’s budget report provided a welcome boost for savers. The surprise change related to the treatment of ISAs on death.

Monday, 15th December 2014, 9:00 am
David Hill INLT 45-099-PSB

Previously, an ISA lost its tax-free status on death, resulting in potentially higher tax bills for the surviving spouse. From now on, however, an ISA account can be passed to a surviving spouse and retain its ISA status. This means that a surviving spouse will not pay any income tax or capital gains tax on future profits.

It should be noted that the change does not apply to inheritance tax. There is currently no inheritance tax when passing assets to a spouse and the tax changes announced last week maintain this position. The possible weakness, therefore, of having a large ISA portfolio, is the potential for a 40 per cent inheritance tax bill on the death of the surviving spouse. ISA portfolios in excess of £200,000 are not uncommon and if the nil-rate band is used up elsewhere, a portfolio of this size would still have £80,000 of tax applied to its value on death.

Other good news for savers was the welcome confirmation of the tax changes that apply to pension funds on death, along with confirmation of the new pension freedoms. Pension funds can now be passed free from tax on death before age 75, even if benefits have started to be drawn down from the pension pot.

It is very important that the spouse isn’t nominated as the beneficiary if inheritance tax is expected to be an issue. Instead, your financial planner should set up a specific type of trust should to receive the benefits on death, which will allow the surviving spouse to have access to the pension fund while still ensuring that the value of the fund can pass to future generations without inheritance tax.

After age 75, any remaining fund can be passed on to children or grandchildren without the previous 55 per cent tax levy. Instead, the beneficiaries will pay tax based on their own tax rate.

David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: [email protected]