When planning their inheritance, Mark and Suzie need a way to keep ownership of, and access to, ISA savings without an IHT liability.
Mark and Suzie have always been diligent savers. They have made particularly good use of ISAs and their precursors.
The tax-free income from their ISA savings has been a useful top-up to their drawdown pensions in retirement, and provided the flexibility to draw capital sums should they need it.
However, they are now both in their early 70s. Over the years their income requirements have reduced, particularly when taking account of their state pensions. They have started to consider inheritance planning as they would like to leave as much of their estate as possible to their children, Poppy and George.
Having reviewed their assets to understand their position, they believe their home and chattels (which will be left to their children) will fully utilise their combined nil-rate band. This includes the main residence nil-rate band. So their ISA portfolio would be subject to inheritance tax (IHT) on being passed down to their children.
They have considered making outright gifts of some of their savings. But they are wary of the need for flexibility, particularly with regards to long-term care.
Neither Mark nor Suzie have amended the amount being taken from their Sipp since they started drawing down in their early 60s. At that stage, they chose to draw close to the maximum allowed under the unsecured pension (USP) rates at the time.
Although their provider carried out the periodic reviews of the maximum pension, which would have allowed them to increase their pensions, this was not needed. They have therefore retained the same level of drawdown, along with a cautious investment strategy.
As their income requirements have fallen and they are now in receipt of state pensions, their adviser recommends looking to reduce the pension they draw from their Sipp. This would reduce the level of income tax paid and allow them to grow the Sipp, which does not usually form part of their estate for inheritance tax.
Under current legislation, their children could access the pension savings, free of tax, should anything happen to Mark and Suzie prior to the age of 75. They could take advantage of flexible access to draw a higher level of pension, should they need to in the future.
Although Mark and Suzie do not require the regular income their ISAs have been providing, they are reluctant to forgo the tax reliefs their ISAs provide on income and growth.
Their adviser recommends they consider investing in AIM shares through their ISAs. With the aid of a specialist fund manager, a portfolio can be constructed from shares that will benefit from business relief after two years.
Under current legislation, this allows them to retain access to, and ownership of, their own savings while also removing the funds from their estate. IHT calculations can be made without the need to gift funds away.
By retaining the ISA wrapper, the gains and income from the shares are tax-free. And they have flexibility of access.
Their adviser makes sure they are comfortable with the risks of investing in smaller companies. As their Sipp savings are invested cautiously, they are willing to take a longer-term view on their ISA savings.
Thornton Wells is a wealth management consultant at Mattioli Woods