It’s actually easier to become an ISA millionaire than you may think.
If you had contributed the full allowance into an ISA each year for the last 20 years you would have around £245,560 before factoring in any investment return.
Even if you are retiring now with £300,000 in ISAs, it will only take around 15 years growing at an annual growth rate of around 8.4% a year to reach £1million. That’s without adding any more contributions.
You wouldn’t want to die an ISA millionaire though.
The expensive problem dying an ISA millionaire
ISAs are great for investing.
The returns you make from your ISA investing are pretty much tax free, meaning you keep more of the money you make.
So whilst you are in the saving phase of your life, they make perfect sense.
They are also really useful for making withdrawals when you have retired as you don’t pay any tax on the withdrawals from an ISA.
So far so good but there is a catch.
The problem with ISAs however is that they are usually added to your estate when working out the Inheritance Tax bill on your death.
So if you have £1million in ISAs on your death and let’s say you own a property that is worth more than the Inheritance Tax allowances, then your ISA will be taxed at 40%.
That means your children and/or other loved ones potentially lose £400,000 of your ISA.
Worse still, even what they do inherit will no longer be in an ISA, it will just be a collection of investments outside the tax efficient ISA wrapper.
This won’t impact spouses and civil partners as there are spousal exemption rules in place that essentially mean there is no Inheritance Tax on first death.
Also, thankfully a few years ago the government did change the rules for spouses and civil partners inheriting ISAs.
In this scenario they can effectively inherit the ISA tax free by way of something called the Additional Permitted Subscription (APS). Not all providers offer this service though so make sure your provider does!
How you can avoid dying an ISA millionaire
There are essentially two ways to avoid all your hard earned ISA saving going to waste on death.
Firstly, there are certain types of shares you can hold that qualify for Business Property Relief. This means they are not subject to Inheritance Tax.
The good news is that you can now hold these types of shares inside an ISA.
For normal investors, the easiest way to invest into these types of shares is via AIM stocks.
AIM stocks are generally smaller companies so can be more volatile than the bigger stocks listed on the main markets. So if you don’t feel comfortable choosing your own stocks you should look into some of the providers offering AIM ISA funds as these will diversify into lots of AIM stocks.
If you feel this type of investing is too risky for you (and remember, you should never invest just with the tax implications in mind, it’s the overall return that counts) then the second option is to consider spending and/or gifting your ISA money whilst you are still alive.
Any gift you make to your children over the £3,000 gifting allowance will not be subject to Inheritance Tax providing you survive for seven years after the gift is made.
If you are not keen to let your children have the money now, especially if they are younger, then you could consider transferring money out of an ISA into a different type of investment inside a Trust.
The advantage of this approach is that you retain control of the fund and the investments and can pass on at a later date. This would then still be Inheritance Tax free providing you survived seven years.
An ISA is great but only at certain times of your life, and this is the same for all tax wrappers. It’s not efficient that you go through life using only one type of tax wrapper, different ones will be appropriate at different stages of your life.
If you would like to organise your retirement portfolio and get the right investment and tax strategy then please get in touch for a free no obligation 15-minute call.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.