The ISA landscape has been transformed in the last few months, with the increased limit of £15,000 and the announcement that junior ISAs will accept transfers of child trust funds being just two key changes. But, there's been another announcement that could have slipped under the radar for many – the fact that partners can now inherit their spouse's ISA.
Pass on the benefits
Under the previous system, when someone died, any savings held in an ISA lost tax-free status and the surviving partner had to start paying tax on any income or returns earned from it. This was a little-known rule that left thousands of people paying extra charges on funds they thought were protected, but now, things have changed.
The rules, announced in the Autumn Statement, mean that as of 3 December 2014, if an ISA holder dies, the surviving spouse or civil partner will be able to inherit the ISA and retain its tax benefits. This will be in the form of an additional allowance that's equal to the value of the ISA at the holder's death, which will be added on to the survivor's own ISA allowance.
In other words, you'd be entitled to an additional allowance that would cover your partner's savings as well as your own, meaning that the tax-efficiency of the ISA won't be lost – and the surviving spouse can benefit from the money that could well have been saved together. The rules apply in any scenario where an individual died from 3 December, and spouses will be able to claim the allowance in the next tax year (from 6 April 2015).
What does it mean?
Let's break things down to explain it better. If your spouse died and they left an ISA valued at £25,000, you'd 'inherit' these funds (or the value of those funds) and would be able to shelter them from tax. You'd then be entitled to an ISA allowance in the 2015/16 tax year of £40,240 – your ISA allowance of £15,240 for that year, and your inherited allowance of £25,000.
The rules of how this will work in practice are still being finalised, but it's largely expected that the surviving spouse will be able to open a new ISA or top up their existing one. Spouses will be able to claim the additional allowance from 6 April, and they'll be entitled to it even if the ISA assets are left to someone else, or if they're used to meet estate expenses. It's worth noting that this allowance is purely for spouses or partners – no one else will be entitled to it, even if they were left the proceeds of the ISA itself.
Essentially, surviving partners will be able to add the value of their spouse's ISA savings to their own, whether that's in the form of the cash itself or through the additional allowance.
It may not be nice contemplating the death of your partner, but financial matters need to be considered in this scenario. This rule change should give valuable peace of mind as it means partners will be able to pass on their ISA savings tax-free, allowing the survivor to benefit from the money that had been so carefully saved.
It also highlights the importance of planning for the future: couples may want to take a look at their wills to ensure ISAs will be left to each other, or at the very least, they could benefit from having a frank conversation about shared assets, savings and their long-term plans. The change means ISAs are becoming even more attractive as a savings vehicle with tax benefits that can be passed on, so it'll be worth comparing the accounts available to ensure you can maximise those benefits.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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