Does it make sense to gift ISAs as an IHT planning strategy
10th January 2025
Posted in Articles, IHT by Andrew Marr
Wealthy families often have significant wealth stored in ISAs which they have built up over their lifetime. Although ISAs are a completely tax-free wrapper (with no income tax or capital gains tax) their value is still subject to inheritance tax (IHT) on the death of the ISA holder. Gifts of assets are outside the scope of IHT if the donor survives over seven years from the date of the gift, but such a gift would lead to the special ISA tax-free status being lost by the recipient. It is for this reason that ISA holders are reluctant to ‘break into’ their ISAs and see these as gifts of last resort – often leading to IHT liabilities in respect of the ISAs when they die.
Key tax implications of gifting an ISA
These are as follows:
1. The value of the gifted ISA will be excluded from the donor’s estate for IHT purposes after seven years (as above).
2. Any growth on the gifted assets will occur outside the IHT net immediately.
3. Taper relief can reduce any IHT liability arising on a failed gift after three years.
4. The ISA assets will no longer be in a tax-efficient wrapper band so future income and gains will be taxable in the hands of the recipient.
Clearly if no gift is made, then the value of ISAs at death would be subject to IHT.
Example
Consider the case of Geoffrey who is 70 years old and is considering whether it makes sense to gift £1m of ISAs to his son, Sean. He has been procrastinating about this for years with a vague idea that breaking the tax-free wrapper would be tax inefficient. He speaks to his tax advisor who persuades him to consider the figures in a methodical way. The figures are set out below.
Do nothing with ISAs (assuming 7% growth)
| Year of Geoffrey’s death | 7% growth | IHT payable | Sean receives |
| 0 | £1,000,000 | £400,000 | £600,000 |
| 1 | £1,070,000 | £428,000 | £642,000 |
| 2 | £1,144,900 | £457,960 | £686,940 |
| 3 | £1,225,043 | £490,017 | £735,026 |
| 4 | £1,310,796 | £524,318 | £786,478 |
| 5 | £1,402,552 | £561,021 | £841,531 |
| 6 | £1,500,730 | £600,292 | £900,438 |
| 7 | £1,605,781 | £642,312 | £963,469 |
Gift ISAs to Sean (assuming 7% growth and 24% tax on growth in Sean’s hands)
| Year of Geoffrey’s death | 7% Growth | IHT payable (Tapered*) | CGT @ 24% on growth | Sean Receives |
| 0 | £1,000,000 | £400,000 | £0 | £600,000 |
| 1 | £1,070,000 | £400,000 | £16,800 | £653,200 |
| 2 | £1,144,900 | £400,000 | £34,776 | £710,124 |
| 3 | £1,225,043 | £320,000 | £54,010 | £851,033 |
| 4 | £1,310,796 | £240,000 | £74,591 | £996,205 |
| 5 | £1,402,552 | £160,000 | £96,612 | £1,145,940 |
| 6 | £1,500,730 | £80,000 | £120,175 | £1,300,555 |
| 7 | £1,605,781 | £0 | £145,387 | £1,460,394 |
*Tapering means that the IHT rate is 8% less for each year after three years since gift (e.g., death after three years means 32% IHT rate and so on).
Forbes Dawson view
The numbers above provide compelling evidence that it makes sense from an IHT perspective for Geoffrey to gift his ISA to Sean. If Geoffrey were to survive seven years then Sean would end up with £496,925 (£1,460,394 – £963,469) more value than if Geoffrey had simply held onto the ISA. Even if Geoffrey were to die in earlier years, the value of the growth outside of his estate trumps the disadvantage of losing the tax-free ISA wrapper. I can see that it still may be tempting for a donor to delay making the gift with the intention of racking up a few extra years of tax-free growth within the ISA and then still surviving seven years from the date of a later gift. Although the numbers may support this, this view may lead to a different sort of procrastination which once again leads to the ISA falling within the scope of IHT. Another incentive for Geoffrey to make the gift as soon as possible could be the availability of an inter-vivos insurance policy. This could lock in the benefit over the seven year period for a relatively inexpensive premium (which could be as little as £6,000 per annum).
