Inheritance tax (IHT) receipts from ISA investments are set to soar as more than half of savers do not realise they form part of people’s estates, Canada Life has warned.
The provider said its annual IHT Monitor revealed more than half (51%) of over 45s do not know ISAs are liable for the tax. It warned many families would, therefore, be at risk of paying millions in “unnecessary taxes”.
The research echoed statistics from Octopus Investments, released last week, which said ISA savers were largely unaware of the savings vehicle’s IHT status and risk having to pay out large amounts on death.
Canada Life said ISAs can only be gifted to a partner, not children without incurring tax.
It warned the government could net a significant tax IHT haul from the £585bn currently invested in ISAs. In the last Budget, HM Treasury predicted it would raise £5.3bn in the 2017/18 tax year in IHT, which will eventually increase to £6.5bn by 2022 to 2023.
Canada Life’s research said rules around IHT are complicated but the majority of people are reluctant to seek professional advice.
It said more than three quarters (77%) think the UK’s inheritance tax rules are too complicated, yet despite this, only a third (33%) have sought professional advice on IHT planning.
Of those who had sought advice, over two fifths (42%) spoke to a professional financial adviser, while more than one in ten (16%) conducted their own research online.
Head of distribution services Karen Stacey said: “There is a huge degree of confusion about the ISA tax rules. Given that some people have been able to amass over a million pounds in their ISAs it’s an area where lack of knowledge could prove costly.
“Many people will inherit less than they expected because they aren’t aware or make assumptions about the rules regarding inheritance. In particular, the rules governing the gifting of ISAs and valuable estates mean that many may be faced with a higher than expected tax bill.”
She added: “Early preparation is the key to success here.
“Taking advantage of alternative methods to secure wealth, such as an onshore investment bond written into a trust or a Wealth Preservation Account to shelter a valuable estate, often ensures that more wealth can be passed onto the next generation.”