View more on these topics

Rachel Vahey: New rules for inherited Isas

Changes mean the valuable tax advantages Isas are famed for can continue after death

When an Isa account holder dies, it is possible for their spouse or civil partner to inherit an additional Isa subscription. This allows them to effectively inherit their partner’s Isa, as long as they were living together at the time of death. This extra allowance is the additional permitted subscription.

In April, the rules changed for how Isas are treated on death, as well as how APSs are valued. APSs are a useful way of sheltering inherited wealth within a tax-efficient wrapper, so it is worth knowing exactly what the changes are and how a spouse or civil partner can make the most of their allowances.

Let’s start with how an Isa is treated on death. For anyone who died before 6 April 2018, the tax advantages for any Isa they held stopped from the date of death. The Isa manager had to remove the funds from the Isa wrapper and the estate was liable for tax on any growth in the funds from the date of death.

Rachel Vahey: Pension tax relief tweaks start to bite

For deaths on or after 6 April, the Isa manager now treats the Isa as a continuing account, which means it continues to benefit from the tax advantages. This remains until the administration of the deceased’s estate is completed, or three years after the date of death if that is earlier. The executors can also choose to close the Isa account at any time, meaning the tax advantages stop. More about that later.

An Isa value can pass to a surviving spouse or civil partner as an extra Isa allowance – on top of their own yearly subscription

As I have mentioned, where an Isa account holder dies, the value of their Isa account can pass to their surviving spouse or civil partner as an additional Isa subscription allowance – on top of their own current year subscription of £20,000 (in 2018/19). However, it will count as previous year subscriptions for all other Isa purposes.

For deaths between 6 April 2015 and 5 April 2018, this additional allowance is the deceased account holder’s Isa fund value on the date of death. But from 6 April 2018, the APS value can be the Isa fund value either at the date of death or when it stopped being a continuing account.

Choices

The spouse or civil partner can choose either value. If the investments value rises, the spouse or civil partner will want to use it at the time the Isa stopped being a continuing account as it will be higher. But if the spouse or civil partner does not want to wait for the estate administration to complete, they can use the Isa value at the time of death.

Money can be taken from the Isa account while it is a continuing account, but no money can be paid in and the funds cannot be transferred.

If the executors choose to take money out of an Isa to pay for funeral expenses, for example, it retains its tax advantages and, when it finally stops being a continuing account, the APS can be either the value at date of death or at the date the Isa is finally closed, subject to the three-year window outlined earlier.

Claire Phillips: Care groups could be advisers’ next professional connections

The spouse or civil partner can pay the additional subscription to the Isa manager who held the original Isa, or to another Isa manager (if they accept APSs from a different source – they are not obliged to). Before the spouse or civil partner can pay in the additional subscription, the chosen Isa manager must send the manager of the deceased’s Isa a note saying they are willing to take the APS from the spouse and ask for the APS value.

It is at this point the executors may want to close the Isa (if the estate’s administration is not yet complete) to take advantage of a potentially higher APS value (compared with the value at date of death).

Once the deceased’s Isa manager confirms the APS value, the spouse or civil partner can make their additional subscriptions. The original Isa can be transferred to the new Isa manager but not on an in-specie basis (unless the Isa is kept with the same Isa manager), or the additional allowance could be met from other funds.

The change in rules is good news. It means the valuable tax advantages Isas are famed for can continue after death and that spouses and civil partners can benefit from higher additional subscription levels.

Rachel Vahey is product technical manager at Nucleus Financial

Recommended

Delivering advice and guidance in the workplace

Three advisers share their ideas and experiences of helping employees with their financial decisions The workplace is instrumental in engaging people to save for retirement. How are advisers helping employers provide advice or guidance to their employees? Telephone guidance Financial education provider and advice firm Wealth at Work recently launched a telephone guidance service to […]

Former Intrinsic and Cofunds director joins consolidator

Former Intrinsic commercial director Adam Smith has joined Fairstone as chief operating officer. Smith will start at Fairstone with immediate effect and will also join the consolidator’s executive committee. Smith held the role of proposition director with Intrinsic from September 2015, moving to the position of commercial director in January last year. He is also […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com