Did you know that you can inherit your partner's ISA savings? New rules came into force in April 2015 that effectively mean ISA assets can now be passed on to spouses or civil partners and retain their tax-friendly status. While it may not be nice to think about, it could make a huge amount of difference.
Did you know? Customers are able to extract funds from a Lifetime ISA without penalty only on the death or terminal illness of the account holder.
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.
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 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 2020/21 tax year, which stands at £20,000).
Essentially, the rules mean that the tax-efficiency of the deceased's ISA won't be lost when 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.
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With savers who are married or in a civil partnership no longer having to worry about what happens to their ISA after death, they can feel free to put the money in any type of ISA they desire, including a stocks & shares ISA for long-term investment. Just remember that there will be other risks involved with investing on the stock market, so if you want to make sure you’re leaving your partner some tax-free savings should the worst happen, consider keeping some of your money in a cash ISA.
It’s easy to see which ISA providers allow APS transfers by looking at the details of the account(s) you’re interested in. Use the ISA product search to find the best ISAs tailored to your needs.
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.