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Inheritance ISAs – the new rules

Inheritance ISAs – the new rules

Category: ISAs

Updated: 11/05/2017
First Published: 11/05/2017

Did you know that you can inherit your partner's ISA savings? New rules came into being in April 2015 that effectively mean ISA assets can now be passed on to spouses or civil partners and retain their tax-friendly status, and although it may not be nice to think about, it could make a huge amount of difference should the time come.

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.

The system was widely thought to be unfair, particularly given the fact that couples tend to save from joint incomes – they'd have to pay tax on money they thought was protected, and thousands of people were caught by these unexpected tax charges every year. Happily, things have changed.

Pass on the benefits

As things stand, at the date of death, the deceased holder's ISA assets still lose their tax-free status, but this can effectively 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 at the date of the holder's death, which won't be counted against the normal ISA subscription limit 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.

In other words, you'll be entitled to an additional allowance that would cover the value of your partner's savings as well as your own. For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £70,000 (the value of your partner's savings and your own ISA allowance for the 2017/18 tax year, which stands at £20,000).

Essentially, 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, and that you'll be able to benefit from the money that could well have been saved together. The changes have been specifically designed to ensure that bereaved individuals will be able to enjoy the tax advantages they had previously shared with their partner, offering more flexibility and a much fairer outcome.

"Approximately 150,000 married ISA holders die each year, so these changes will benefit spouses or civil partners by increasing the amount that they can save by offering the tax advantages in an ISA wrapper," said Carol Knight, operations director at TISA. "We see it as a much fairer outcome and one we have long advocated. [Surviving partners could have] lost out significantly under the previous rules whereby investments held by deceased ISA savers lost their tax-free status… Allowing ISA savings to be transferable will enhance flexibility and will act as a further incentive to save within these vehicles."

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 – no matter how much they'd saved in an ISA, you'll have that amount as an additional allowance. In the event that 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 (referred to as APS payments) can be made to any ISA offered by the ISA manager (cash ISA, stocks & shares ISA or innovative finance ISA). An APS payment can be made to, either the deceased's ISA provider or with an alternative ISA provider that will accept APS subscriptions (not all will). Some ISA providers will allow payments to be made in instalments whereas others only allow a lump sum, so make sure to check.
    As we mentioned above, each ISA held by the deceased creates its own APS allowance for the survivor. The survivor then has 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. This means that where the deceased had multiple ISAs, the survivor can choose to combine all their APS payments into one, but they are not required to do so.
  • 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 paymentshave 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.

What next?

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

 
 

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