Changes to ISA inheritance rules implemented in April 2015 brought an end to what had been seen as an unfair and punitive ‘death tax’, with up to 150,000 people a year set to benefit by inheriting their partner’s ISA tax benefits.

 

Before then, upon the death of an ISA account holder, the account was closed and the tax-free status of the investment terminated; the new regulations reverse this as long as certain conditions are satisfied.

Now, the value of the deceased’s ISA passes to the surviving partner as an extra allowance in that tax year; for example if someone were to pass away leaving an ISA valued at £50,000, a surviving partner in the current tax year would have an ISA allowance of £70,000 – the 2019/20 annual ISA allowance of £20,000 plus an inherited allowance of £50,000.

‘the value of the deceased’s ISA passes to the surviving partner as an extra allowance’

The extra allowance is called the additional permitted subscription (APS) allowance and it is not dependant on the surviving spouse inheriting the actual money or investments held within the ISA.

To claim, the surviving spouse or civil partner must have been living with the deceased account holder at the date of death and not be separated by a court order or a deed of separation.

‘Living together’ is extended to circumstances where one of the couple is in a care home because of illness or infirmity in the same way that the married couples allowance operates; those whose spouse or civil partner died on or after December 3rd 2014 are eligible.

If the deceased held more than one ISA, these are combined to create an overall sum which the surviving partner can claim in addition to their own ISA allowance for the tax year.

Additional ISAs are thereby opened above the current limits and any additional subscription may be made with the ISA manager who maintained the deceased’s account or one to whom the APS has been transferred.

Those who wish to capitalise on the increased ISA allowance must do so within three years of their partner’s death, or 180 days after completion of their partner’s estate being fully administrated.

‘up to 150,000 people a year set to benefit by inheriting their partner’s ISA tax benefits’

Spouses will be entitled to the allowance even if the ISA assets are left to someone else in a will or are used to meet expenses from the estate and may make a lump sum or regular payments into the account which may be a Cash ISA or a Stocks and Shares variant.

The APS is not transferrable to another party even if they have received the assets from the ISA; the allowance cannot be applied to a Junior ISA.

The new freedom presents couples with fresh estate planning opportunities as there is clearly an advantage for the surviving spouse to gain the tax advantages of their partner’s ISA, although the use of tax-efficient trusts to lock away money for children or other future inheritors may offer still greater advantages than an ISA.



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One response to “ISA Inheritance”

  1. DIY Investor - The Do-It-Yourself Investing Blog says:
    March 1, 2018 at 12:50 pm

    […] Inheritance ISA can be opened by widows, widowers and bereaved civil partners who have lost their spouse or civil […]

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