Inheriting ISAs: why it matters which provider you pick
Individual Savings Accounts (ISAs) have seen a number of policy changes over recent years. Most savers are familiar with the increase in the allowance to £20,000 in the 2017/18 tax year (up from £15,240), but fundamental changes have occurred to the way they’re treated after death, particularly for married couples or those in a civil partnership.
At the end of 2014, the government announced that a surviving spouse can inherit their deceased partner’s ISA along with its tax-free status.
In 2015, the Additional Permitted Subscription (APS) was also introduced. This allows for a surviving spouse to inherit a one-off additional ISA allowance equivalent to the value of the deceased’s ISA at the time of death. As an example, if the deceased held £25,000 in a cash ISA at the time of death, the widow/widower would have an APS allowance of £25,000 on top of their own £20,000 ISA allowance.
However, HM Revenue & Customs confirms that ISA providers aren’t obliged to offer the APS facility. “Whether an ISA manager accepts a single or a series of APS is a matter for the terms and conditions of their ISA products”, a spokesperson said.
A number of well-known high street cash ISA providers have confirmed they don’t offer the APS. As such, if the deceased person’s ISA is held with a provider which doesn’t offer the APS, there’s more paperwork to deal with and difficult decisions for the surviving spouse at an already stressful time.
Below are examples of ISA providers that don’t offer the APS, plus comments from the banks and building societies:
- Post Office: “We can confirm we cannot receive APS for ISAs. There are no fees/charges for moving the deceased’s ISA out of the Post Office to an APS ISA provider, and there are also no fees applied to the deceased ISA holder’s money once it’s withdrawn and passed to the spouse.”
- Tesco Bank: “The APS allowance can only be set against an Instant Access ISA. This Instant Access ISA can either already be held with Tesco Bank or be opened by the surviving spouse.” Tesco confirmed that the APS does not apply to its Fixed Rate ISA product.
- Leeds Building Society: “We don’t currently offer APS but do keep our range under review.” It added there are no charges for transferring the deceased member’s ISA to an APS provider.
- Manchester Building Society: “The Society does not accept APS payments. On the introduction of APS, we reviewed the additional requirements on the Society, which included potential investment in new system functionality and producing and maintaining new processes and procedures. We also considered the likely demand level for transferring APS. We took the decision on balance not to offer APS, but to keep the matter under review. We will of course assist the spouse/civil partner of a deceased customer to transfer an APS allowance to an APS accepting provider.”
- Cambridge Building Society: “While we don’t offer the APS we do support spouses or civil partners move the funds elsewhere if they wish and without penalty.”
- Harpenden Building Society: “We do offer APS for an existing Harpenden spouse/civil partner member, however due to restrictions on our ISA we do not accept APS to be transferred to us from other ISA managers. The reason for this is that we are not allowing ISA transfers at thecurrent time. If it’s the surviving spouse’s wishes, we can transfer the APS allowance to another provider.”
Rob Morgan, pensions & Investments analyst at Charles Stanley Direct says the APS is a more labour-intensive process than a standard subscription. Special paperwork is needed to cater for it, which is why it may not be offered by all providers: “The decision not to accept these types of subscription is likely a commercial decision on the part of certain companies, and I can imagine that for providers with a large number of older clients with relatively low-value accounts the additional work involved might become onerous – making it mandatory might unfairly impact certain organisations over others.”
What does this mean and what do you need to do?
If you’re the surviving spouse, the next steps depend on whether your deceased partner’s cash ISA was held with a provider offering APS and where your own ISA cash is held.
Paul Latham, managing director at Octopus Investments says there is no requirement that the spouse has to use this allowance with the same ISA manager as their deceased spouse.
The below table may help on what action may need to be taken by the surviving spouse:
The simplest message is to contact the provider you wish to use the APS allowance with, according to Morgan. “This could be the deceased’s provider, an existing provider used by the surviving spouse (provided these offer APS of course) or a completely different one. The APS ISA provider will contact the deceased’s ISA provider for you to clarify the necessary details,” he says.
He adds that the APS can be transferred to another provider fairly easily, but if the deceased holds lots of ISAs with different providers, this will be an administrative headache for the surviving spouse with each one producing an APS.
Tom Adams, head of research at Savings Champion, says inheriting ISAs can be a complicated area to navigate. He says: “The ability to keep the amount that your spouse accrued within a cash ISA is positive, but once the allowance is received, the complicated area for many is working out the best home for the funds.
“As with any savings account, it is important to ensure you get the best rate you possibly can, but be aware that not all providers will allow an APS to be placed with them and so your options may be more limited as a result. Make sure that the provider you are interested in will accept the funds and then go for the most suitable type of ISA and the highest possible return to make the most of the APS allowance.”
What about investment ISAs?
Looking beyond cash ISAs, Latham explains that for stocks and shares ISAs, the surviving spouse has a choice of the following:
- If they want to invest cash (either cash they already have or the cash proceeds arising from the liquidation of the deceased’s ISA) they can open an ISA with any ISA manager within three years of the deceased passing away (or 180 days after they come into beneficial ownership of the ISA portfolios, if later and if relevant). This can be either a cash ISA or a stocks and shares ISA;
- If they inherit the ISA portfolio(s) from the deceased, they can choose to retain them in specie, and to open a new portfolio in their name with the existing ISA manager into which their deceased spouse’s stocks can be transferred once probate has been concluded. They have 180 days to do so following beneficial ownership of the deceased’s ISA portfolios passing to them from the estate.
Latham says: “While the first option is available even if the spouse does not inherit the deceased’s ISA portfolio, the second is not. With the second scenario, if the portfolio has increased in value since the death, they are currently restricted to only being able to transfer a maximum equal to the value of the portfolio on the day that their spouse died.
“Capital Gains Tax may be payable in this case, as the shares will have increased in value outside of the ISA wrapper during probate – in some instances the spouse may prefer to retain the assets outside of an ISA wrapper for this reasons. Alternatively if the portfolio has dropped in value since death, the spouse can chose to invest additional funds, up to the value of the ISA when their spouse died.”
Are you aware of any investment ISA providers not offering the APS? Let us know in the discussion forum below.