Whether you want to save for your retirement, make a major purchase such as a new vehicle, or leave behind money for your loved ones after your death, an ISA can help you achieve your financial goals.
But how do ISAs work and what happens to an individual savings account after the account holder dies?
Let’s find out.
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ISAs Provide a Financial Safety Net
Individual savings accounts can hold investments and savings. This type of account doesn’t require paying taxes on capital gains or interest. While this type of savings account sounds like the perfect way to set aside money for the future, it does come with some limitations.
Each year, you will only be allowed to deposit a total of twenty thousand pounds.
Choosing an ISA
There are many different types of ISAs to choose from including:
- Stocks and shares
- Cash
- Help to buy
- Innovative finance
- Lifetime
You can spread your annual allowance across different types of ISAs or you use your entire annual allowance in one account. If you plan on spreading out your annual allowance into a variety of ISAs, look specifically for an ISA provider that allows this, as some will only allow you to pay into one ISA a year.
Cash
The cash ISA works like a basic savings account. The only real differences here is the fact that the ISA is considered tax efficient, and you’ll have the twenty thousand pounds limitation. The type of interest rate you can expect will vary based on the provider.
Stocks and Shares
A stocks and shares account can be a great option if you have an extensive portfolio since the account works as a wrapper for different kinds of investments. A stocks and shares savings account will provide a better return compared to a cash ISA, however, you may not get back all the money you invest since investments tend to rise and fall throughout the year.
Get a Free Estate Planning ConsultationHelp to Buy
These ISA accounts are designed to help account holders purchase a home. However, you must meet certain qualifications. First, the money must be used to purchase your first home. Second, you must plan on living in the home you purchase. The home you buy cannot be flipped or rented out. Next, the worth of the house must be valued under two hundred and fifty thousand pounds. If the home is located in London then it must be valued under four hundred and fifty thousand pounds. Help to buy ISAs come with a twenty-five percent government bonus which can total up to a maximum of three hundred pounds. With this type of account, you can save up to two thousand and four hundred pounds annually. Most help to buy providers will also require a minimum of one thousand pounds to open an account.
Innovative Finance
If your funds are held in an innovative finance ISA, then any interest earned via peer to peer lending will be tax efficient. So, what is peer to peer lending exactly?
A peer to peer loan involves loaning out your own money to individuals or businesses who are in need of a loan. Obviously, this can be very risky, if the company or individual you loan money to decide to default on the loan. Typically, the bank or ISA provider will spread out the money you loan among several businesses and individuals in order to minimize the risk of losing a large chunk of your hard earned money.
Lifetime
A lifetime savings account can help you save for retirement or for a major purchase. With this account, you can hold both stocks and shares and cash. In order to qualify, you must be under the age of forty. This ISA allows you to save up to four thousand pounds a year until you turn fifty years of age. The government also offers a twenty-five percent bonus with this account, providing a maximum of one thousand pounds a year. If you want to withdraw funds from a lifetime ISA you must pay a twenty-five percent fee unless the funds are used to purchase your first home.
What Happens to Your ISA After Death?
ISA regulations changed back in 2016. These changes were designed to improve the tax position regarding the state of an ISA after the death of the account holder.
These days, income tax will apply to any income due after the account holders date of death. The post death gains will be subject to capital gains tax.
Additional Permitted Subscription
The additional permitted subscription, or APS for short, provides the surviving civil partner or spouse with an additional allowance that’s equal to the value of the account holder’s individual savings account on the date they died. While the additional subscription can be very complicated in situations in which investments rise or fall in value before they’re moved into the survival civil partner’s or spouse’s ISA, the APS is considered a welcome addition to the ISA. However, the account holder’s estate will be responsible for any capital gains or income taxes due before the date of death.
Inherited Allowance
If a civil partner or spouse dies and they have an individual savings account, you will be eligible to receive an inherited allowance. However, you must meet specific criteria in order to qualify. You must have been in a civil partnership or married to the deceased account holder at the time of their passing. If you were legally separated or living in separate residences at the time of death you will not qualify for the inherited ISA allowance.
The inherited allowance is in addition to the standard twenty thousand pounds allowance for the basic ISA. This inherited allowance is based on the value of the individual savings account the deceased held. The deceased account holder may have had more than one ISA, by different providers, in which case, you can choose to have the total inherited allowance transferred to a single provider or you may be required to file for separate inherited allowances for each of the providers.
Complications can arise regarding the fate of an ISA, which is why planning ahead in so crucial.
How Estate Planning Works
Estate planning can be an overwhelming experience for some, considering it involves making plans regarding the state of your affairs, after the time of your death. However, doing so will ensure that your loved ones are taken care of and receive your property and assets, including your ISA, in the event of your death.
But estate planning doesn’t just involve learning how ISA inheritance works.
In general, beneficiaries are expected to pay forty percent in inheritance taxes. This steep tax is a result of frozen tax thresholds and rising property prices. However, it can also be a result of failing to ensure your affairs are in order at the time of your death.
There are plenty of exemptions you can take advantage of that may help to mitigate the tax paid. Unfortunately, most families fail to discuss how they want to pass on their legacy.
This is where the experts come in. Financial experts can help ensure that you make all the right choices and take advantage of as many exemptions as possible.
Click here to learn more about what is estate planning.
Understanding Inheritance Tax
At the time of your death, the government will step in and tax your estate forty percent. Many feel that this rate is too steep and failure to prepare for this type of taxation can really hit your estate hard, leaving behind little of your assets for your loved ones. But there are some steps you can take that will help to minimize what is taxed in your estate. There are also ways you can help prevent taxation altogether, such as putting an insurance policy into a trust.
To learn more about what is inheritance tax, click here.
How Inheritance is Taxed
When a person passes away, the value of their estate becomes liable for inheritance tax. Your estate essentially encompasses everything you own, including your ISA, certain trusts, and your home. However, people can pass on three hundred and twenty-five thousand pounds inheritance tax-free.
This is known as the nil-rate band. Civil partners and married couples can share their thresholds and transfer any unused elements of their inheritance tax-free allowance to their living partner or spouse when they die. Doubling this sum allows civil partners and married couples to enjoy a joint nil-rate band for a total of six hundred and fifty thousand pounds.
Recently, an extra allowance was introduced. This allowance is known as the residence nil-rate band and it’s designed for direct descendants of the deceased. This nil-rate band allows unused elements to be transferred to the deceased’s direct descendants. The residence nil-rate band allows up to one hundred thousand pounds to be transferred per person. Basically, civil partners can pass on a maximum of eight hundred and fifty thousand to their children via two lots of three hundred and twenty-five thousand pounds, and two lots of one hundred thousand pounds, without being hit with a steep inheritance tax.
To learn more about exemptions and how to avoid inheritance tax, click here.
How to Take Advantage of Inheritance Tax Exemptions
Aside from the nil-rate bands, there is a wide range of exemptions that you can take advantage of with careful estate planning. These exemptions can help to reduce the total inheritance tax bill.
Discussing your inheritance wishes with a professional is a vital first step if you want to pass on as much of your wealth as possible. A professional can help draft an estate plan designed to suit your needs including how to pass on and protect your ISA, and how you want your other assets, including your home and other properties, distributed. While it’s true, you can do all the research yourself regarding possible tax exemption options available, you need the help of a specialist to ensure all of your affairs will be taken care of exactly the way you want it, at the time of your death. Planning ahead can ensure your wishes are met and will also provide you with much-needed peace of mind.
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Preparing Your Estate and Protecting Your ISA
As you can see, there is an extensive amount of planning that must go into getting your affairs in order. Aside from learning how to protect your ISA, deciding on a beneficiary for your ISA, and drawing up a will, you must make sure that the arrangements you have made are legal and will be recognized by the government at the time of your death. In order to avoid your estate being tied up after your death, documents must be drawn up by a professional. During this time the total value of your estate will be calculated, allowing you to precisely divide up your assets and assign one or more beneficiaries.
Planning ahead by signing up for an ISA that works for your savings goals and creating a plan that will ensure your family is taken care of after your death will be one of the most important steps you’ll ever take. Because of this, it’s crucial that you put this important task in the hands of experienced professionals who can guide you through this difficult process.
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