Death and ISAs: rules to change in April
In 2015, the Additional Permitted Subscription (APS) was introduced which allows 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 for 2017/18.
While a benefit to married couples and civil partners, kinks in the system have come to light.
For instance, while the surviving spouse gains the APS, they don’t necessarily gain the funds. The money from the deceased’s ISA will form part of their estate and can be left according to their wishes as set out in a will.
This poses two issues:
If the ISA money is left to a family member or friend (anyone other than a spouse), it may be subject to Inheritance Tax (IHT) as part of the deceased’s estate. This means the ISA money comes out of its tax-free environment into a taxable environment for the purpose of distributing the deceased’s estate, even if that money is then later added to an ISA.
Probate (dealing with a deceased’s estate) can take some time. Between the date of death and the day the administration of the estate is complete, you could see the value of the ISA grow but the growth won’t be tax-free.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Unfortunately, the administration of a complex estate can take months, or even years. During this time, the ISA investments may continue to grow. If, for example, you have a £1 million ISA portfolio, growing at 5% a year, you could end up with around £160,000 of growth over three years. This causes two headaches.
“First, during the administration of the estate, growth in the ISA is being exposed to taxation. Second, the fact that the assets may be growing and the ISA wrapper isn’t, means that the surviving spouse may not be able to rewrap all of those assets in an ISA once the administration of the estate is complete.”
New death and ISA rules
From 6 April 2018, new rules will come in (for all types of ISA except the Junior ISA) meaning that when the investor dies, their ISA becomes a ‘continuing account of a deceased investor’ or a ‘continuing ISA’ for short.
Coles explains that no money can be paid into it from this point, but it will continue to benefit from the tax advantages of an ISA, so growth will remain tax-free. Its status as a continuing ISA lasts until either the administration of the estate is complete, the ISA is closed, or three years have passed since death – whichever is sooner.
The legislation also affects the APS ISA allowance that can be passed to the spouse. At the moment, the allowance transferred to the surviving spouse is equal to the value of the ISA on the date of death. But in April 2018, the APS will normally be the value of cash or investments passed on, or the value of the ISA on the date of death – whichever is higher.