Dr. Benson’s Casebook

“I thought ISAs were tax free?”

This is the first in a series of blogs from “Dr. Benson’s Casebook” .
Our Technical Manager, Mark Benson, delves into his IHT surgery files for topical cases and selects those likely to be of most interest to IFAs (and their clients)..

In each case he gives his opinion and demonstrates the methods he would use to solve the issues raised.

Case Study:

Graham is 70 and a divorcee.  He has two adult daughters from his former marriage who will eventually inherit his wealth.  His assets are as follows:

Assests:
House (mortgage free): £300,000
Bank accounts: £15,000
Cash ISAs: £20,000
Stocks & Shares ISAs: £70,000
Value as at May 2011: £405,000

He has met with his IFA who suggests that he should undertake some planning to reduce his potential Inheritance Tax (IHT) bill of £32,000.  Graham is perplexed, since he is aware that he can leave £325,000 in his will free of IHT and thought that his taxable estate would fall within that nil rate band?

He consults Dr. Benson at his IHT surgery, who says:  Graham’s IFA is quite correct in his assessment of the potential IHT liability.  It turns out that Graham held the common misperception that his ISA investments really were tax free, and so did not count them when calculating his estate.  Graham can be easily excused this confusion. For example, a visit to a well known consumer money website garners the following explain of an ISA:   “it’s simply a tax free wrapper into which you can place either cash or shares.”

Unfortunately the site in question, along with many others who also ought to know better, has incorrectly suggested that ISAs are completely tax free and overlooked the fact that the tax advantages only extend to Income Tax (partially) and Capital Gains Tax (CGT), but not to IHT. Graham’s IFA has therefore correctly calculated the potential IHT liability.

The good news for Graham is that I can reassure him that he has been well advised to make use of his ISA allowances up to this point. The savings in Income Tax on his Cash ISAs and CGT on his Stocks and Shares ISAs over the years are real and valuable. However the situation now is that, as he enters the later stage of his life, the future savings in these two taxes are likely to be less valuable than the potential savings if the IHT issues were to be addressed. Let’s see why:

If Graham were to transfer most of his ISA funds into a flexible reversionary interest trust he could remove the current IHT liability once the transfer falls out of account after 7 years, whilst retaining the potential to benefit from the capital if needed in the future. This would mean forgoing the Income Tax and CGT benefits of the ISA wrappers. Could the lost benefits amount to more than the potential IHT saving of £32,000?

Let’s first consider his cash ISAs. The potential IHT on the £20,000 balance is £8,000. Graham has kept a careful eye on the rates on offer and has transferred his holding into the current “best buy” account paying 3.35% p.a. (source Moneyfacts.co.uk). As a basic rate taxpayer he therefore saves £134 p.a. in Income Tax on the interest received. That sounds great, until I point out that it will take him almost 60 years to save enough Income Tax to offset the IHT bill!

How about the Stocks and Shares ISAs? Suppose that Graham lives another 10 years to age 80 and that he enjoys an average capital growth of 5% p.a. over that time. His holdings would grow to just over £114,000 which would attract an IHT charge of around £45,000 (ignoring growth in the nil rate band) if held in his estate at death. If the assets had been transferred into the trust, and the trustees passed on the units to his daughters after his death, their CGT bill would be less than £13,000 (at the very worst, but probably much less with some simple tax planning) – below 1/3 of the potential IHT liability.

In conclusion, although Graham’s ISAs have been a valuable and sensible choice over previous years, now may be the time to think about saving IHT as a priority over Income Tax and CGT.

Mark Benson, TEP CertPFS,
Technical Manager, WAY Investment Services Limited
13th June 2011
www.waygroup.co.uk

Posted on 13th June, 2011 | Tags: Dr Benson's Casebook |
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Cycling for Charity 2011

The WAY Fund Peddlers… three intrepid members of the WAY team are embarking on a cycling challenge for charity.

The WAY Fund Peddlers are made up of Fund manager, Trevor Chanter – who developed the idea for this ride in the first place – and two of our Regional Sales Managers: Rob Owen and Peter Atkins.

They will be travelling through the New Forest in October 2011 as part of their epic 100 mile route, which they hope will raise money for two charities:

(a) www.jdrf.org.uk : Juvenile Diabetes Research Foundation (for young people with Type 1 diabetes) and;
(b) www.neuroblastoma.org.uk : The Neuroblastoma Society (fighting childhood cancer).

For more information about either of these charities, please access their websites using the links above.

The WAY Fund Peddlers intend to hold a 50 mile warm-up ride taking place on Sunday 12th June 2011 in Newbury, where they will also be joined by another of our Regional Sales Managers, John Humphreys.

If you wish to donate to these worthy causes, their respective JustGiving pages are here:

(a) http://www.justgiving.com/wayfundpeddlers/ and;
(b) http://www.justgiving.com/helpingkidswithcancer

The WAY Fund Peddlers would really appreciate your support in any way you can give it. Thank you.

Paul Wilcox
Chairman & Technical Director, WAY Group
6th June 2011
www.waygroup.co.uk

Posted on 6th June, 2011 | Tags: Charity |
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