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Inheriting ISAs – the new rules

Inheriting ISAs – the new rules

Category: ISAs

Updated: 06/04/2016
First Published: 17/11/2015

Did you know that you can inherit your partner's ISA savings? New rules came into being in April 2015 that 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. 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 now changed.

Pass on the benefits

The rules mean that if an ISA holder dies, the surviving spouse or civil partner will be able to inherit the ISA and retain its tax benefits. This is in the form of an additional allowance – the surviving partner is given an 'additional permitted subscription' (APS), 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 ISA limit.

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 £65,240 (the value of your partner's savings and your own ISA allowance for the 2016/17 tax year, which stands at £15,240).

Essentially, the rules mean that the tax-efficiency of the ISA won't be lost, 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 payments) can be made to a cash ISA and/or a stocks & shares ISA, either with the deceased's ISA provider or with an alternative 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.
  • 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 subscriptions have been made under the allowance. But, after an APS allowance payment has been made, the cash and/or investments related to that subscription can be transferred to another ISA.

What next?

Compare cash ISAs

Consider stocks & shares

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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