Updated 03 September 2020
Time to revisit an old friend (or enemy)?
It’s fair to say that there is a lot going on at the moment. A better outlook for investors as the economy recovers, new flexibility for pension savers announced in the recent Budget, and greater levels of tax-efficient savings allowed into an Individual Savings Account (ISA) from 1 July being some immediate examples.
What does this mean for consumers?
This is all great news for consumers. However, as with most things in life, there is a balance to this positive news. Recent figures from the Treasury led to an article in the Telegraph which said “Treasury forecasts suggest that rising house prices and the recovering economy will push tens of thousands more people over the £325,000 threshold”. The threshold referred to is an individual’s liability to inheritance tax (IHT).
To put this into context, the article already mentions house prices and potentially better investment returns in the recovery but it’s the Budget announcements that need to be factored in. IHT is charged on all of an individual’s free estate and this is where the new ISA limits of £15,000 from 1 July could make the IHT position worse. An ISA is a fantastic tax-efficient savings vehicle for most savers and many already have large sums of money in these tax wrappers. The increased limit gives additional income tax and capital gains advantages but the one tax where an ISA is usually not at all efficient is IHT. There are some assets that can be held in an ISA which could make them IHT-free, however, they usually carry a higher risk than many investors want to have. As a reminder, IHT is charged at 40% on assets above the £325,000 threshold, which has now been frozen for the next few years.
What else should be considered?
The other aspect of the Budget that could have an IHT consequence is that of pension flexibility. For many of us that have pension savings there will be increased flexibility from April 2015. Even from March this year the limits to access smaller pension pots were dramatically increased. From 2015 if you are over 55 you could access all of your pension savings with 25% of this paid tax free and the balance subject to tax at your marginal rate. I have two words of caution here. First, don’t take too much at once as this could quickly push you into higher rate tax when added to any income you already have. Second, a pension is a great wrapper from an IHT perspective before you draw your benefits. In nearly all cases the money is free from IHT if you haven’t touched it but if you take the flexible access you will pay income tax on 75% plus, and if you don’t spend this money it may be in your estate for IHT purposes as well!
So, as ever, a lot of good news around for consumers at the moment, but always look for the balance and get the right advice to ensure you consider all aspects of tax.
Written by Andy Zanelli, Head of Retirement Planning, AXA Wealth
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