Inheritance ISAs – the new(ish) rules

Did you know that you can inherit your partner’s ISA savings? New rules effective from April 2015 that mean ISA assets can now be passed to spouses/civil partners and keep their tax-friendly status. However many people are unaware of this change.

Why the change?

Under the previous system, when someone died, any savings held in an ISA automatically lost their tax-free status, and the tax benefits were lost forever. This meant that the surviving partner would have to start paying tax on any returns or income earned from it, which could add up to a significant sum if the ISA holder had been saving for many years.

Pass on the benefits

At the date of death, the deceased holder’s ISA assets still lose their tax-free status, but can be regained in the form of an additional allowance. The surviving partner is given an ‘Additional Permitted Subscription’ (APS) allowance, a one-off ISA allowance that’s equal to the value of the ISA’s at the date of death and not counted against normal ISA subscriptions but will instead be added on to the survivor’s own annual ISA limit. If the partner had multiple ISAs with different providers, the surviving partner receives an APS allowance for each one.

For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £70,000 (Your partner’s savings pot value and your own ISA allowance for that tax year (currently £20,000).

The rules mean that the tax-efficiency of the deceased’s ISA won’t be lost where the surviving partner makes use of their APS allowance.

Rules at a glance

  • Eligibility: Anyone whose spouse/civil partner died on or after 3 December 2014 is eligible, and the APS could have been claimed since the start of the 2015/16 tax year.
  • Pot size: The rules apply irrespective of the size of the deceased’s ISA pots. Where more than one ISA was held by your partner, the pots will be combined to give an overall additional subscription amount that you can claim.
  • Subscriptions: APS allowance subscriptions can be made to any ISA offered by the ISA manager (cash/ stocks & shares etc). An APS payment can be made to, either the deceased’s ISA provider or an alternative ISA provider that will accept APS subscriptions. Each ISA held creates its own APS allowance for the survivor. There are then two options – they can keep each APS allowance with the existing ISA provider, or they can transfer the whole of that APS to a different one. Each individual APS amount cannot be split between different ISA providers; it must remain whole.
  • Time limit: Chances are, arranging your new allowance won’t be at the forefront of your mind on the death of your partner. In most cases, at least for subscriptions made in cash, the allowance is available for three years after the date of death.
  • Process: ISA providers will require key information and personal details from the spouse/civil partner to open a qualifying ISA, and they’ll also require an application form to use the APS allowance.
  • Transfers: The APS allowance can be transferred to another ISA provider, subject to the new provider’s acceptance. It can only be transferred once and only where no APS payments have been made under the allowance. But, after an APS payment has been made, the cash and/or investments related to that subscription can be transferred to another ISA.

For more information please do not hesitate to contact me.

 

Kind regards Claire