AEGON Scottish Equitable asks, when is tax free not tax free?

AEGON Scottish Equitable warns of inheritance tax threat from so called ‘tax free’ savings products.

AEGON Scottish Equitable is warning advisers to be aware of their clients’ potential inheritance tax liability that may be incurred if they have amassed a large portfolio of tax free savings such as PEPs and ISAs.

AEGON Scottish Equitable says the major problem with these investment products is that although they are tax free during the individual’s lifetime, on death, they form part of the estate for inheritance tax. This means that if their estate is above £300,000 (the nil rate band for 2007/08), they may be taxed at 40% on death on assets above this rate.

AEGON Scottish Equitable has calculated that an individual who has taken their full PEP or ISA allowance since this type of investment was launched in 1987 would now have amassed in excess of £375,000 assuming that their investments had grown at the same rate as the average unit trust. This is well over the current nil rate band which could have a major and unexpected impact on the value of their estate – and this is without including the value of any property or other assets they may hold.

Margaret Jago, Technical Manager at AEGON Scottish Equitable said: “Many people are not aware that although PEPs and ISAs are tax free, they are not exempt from inheritance tax. The real problem here is that we just don’t know how many people could potentially be affected. We believe that many individuals will have crept over the current IHT threshold without realising they have done so.

“Whilst this type of investment is tax free throughout their lifetime, when the investor dies, it becomes part of their estate for inheritance tax purposes”

AEGON Scottish Equitable is therefore urging advisers to review their clients’ investment portfolios and be aware that investing large sums of monies into these types of investments over a period of time could take them over the threshold, leading to a tax liability. Other forms of investment, for example onshore or offshore investment bonds, are liable to tax on their growth but may be suitable for use in estate planning.