Married or in a civil partnership? Taking the ‘individual’ out of ISAs
On 6 April 2015, new rules came into effect concerning Individual Savings Accounts (“ISAs”). This update focuses in particular on the new transferable ISA tax benefit on the death of a spouse or registered civil partner.
Under previous rules ISAs, like any other asset, could be passed via your Will to beneficiaries but would lose their tax saving attributes during the process. Under the new rules, effective from 6 April 2015, ISA holders are now able to pass the tax saving element of their ISA investments to their surviving spouse or civil partner on their death.
Who is affected by the changes?
- Anyone whose spouse or civil partner died on or after 3 December 2014 and held an ISA in the UK at the date of their death
- And from the point of view of planning for the future, anyone who currently holds ISAs in the UK and is married or in a civil partnership
(Note; whilst you can still claim the benefit if you live abroad, the way in which you use the benefit may be limited.)
What is the new benefit?
Where a person dies holding an ISA (either cash and/or stocks and shares), the surviving spouse or civil partner is entitled to an additional ISA allowance equal to the value of their deceased spouse’s or civil partner’s ISA holding at the date of their death.
This allowance is in addition to the survivor’s normal annual personal ISA allowance. The allowance is an independent benefit and always passes to the surviving spouse or civil partner, irrespective of to whom the actual assets in the ISA pass under the Will.
For example; if a person dies leaving an ISA worth £30,000 to their child, the child will receive the ISA assets of £30,000 and the deceased’s surviving spouse will receive an additional subscription allowance equal to the value of £30,000 on top of their normal personal annual allowance (£15,240 for the 2015/2016 tax year) resulting in a combined ‘one-off’ allowance of £45,240.
How does it work?
The value of the allowance is calculated at the date of death of the spouse or civil partner and is equal to the value of the holding (or
combined holdings) at that date. Where the deceased had multiple holdings with different providers, there will be a separate allowance for each ISA provider.
From the date of death until the date of distribution of the value at probate (for example the transfer or closure of the ISA account), the deceased’s ISA loses its tax efficient wrapper and therefore the holding becomes liable for income and capital gains tax during this period.
How do I use the benefit?
The inherited allowance is a ‘one-off’ benefit and any additional permitted subscriptions made under this allowance are treated as previous year ISA subscriptions for all ISA purposes.
The particular rules on using the benefit and which ISA provider you can invest with will be dependent on the facts of your particular situation and how you inherit the underlying ISA assets but generally, if the surviving spouse or civil partner does not inherit the underlying ISA assets or inherits a cash ISA, they may subscribe up to the value of that holding with their own (or inherited) cash. Additionally, if the survivor inherits all or part of a stocks and shares ISA they may subscribe all or part of that holding ‘in specie’ (i.e. without selling the underlying investment).
Are there any time limits that apply?
The allowance is available, for cash subscriptions, for up to three years after the date of death or for up to 180 days after administration of the estate is completed, whichever is the later. In respect of deaths between 3 December 2014 and 5 April 2015, the deceased is treated as having died on 6 April 2015.
For ‘in specie’ transfers, the time limit is 180 days from beneficial ownership passing to the surviving spouse. In respect of deaths between 3 December 2014 and 5 April 2015, the 180 days will run from either 6 April 2015 or the actual date of beneficial ownership passing, whichever is the later.
Will the new rules reduce my Inheritance Tax (IHT) burden?
No. Assets passed between spouses or civil partners are already exempt from IHT and therefore there is no saving on this front. The tax saving arises in relation to potential income or capital gains tax which, under the previous rules, would have been payable by a surviving spouse or civil partner in relation to ISAs transferred to them.
What should you do now?
In order to take full advantage of the new rules if you are married or in a registered civil partnership, it is advisable to check your Will and make sure any ISA holdings are left to your spouse or civil partner. This will ensure that sufficient funds are available on your death to make full use of the allowance. If, for example, the funds in the ISA are left to your children and only the value of the allowance passes automatically to your surviving spouse or civil partner, your surviving spouse or civil partner may not have sufficient additional funds to invest to take advantage of the full ISA allowance amount.
Please note that this update provides a brief overview of the new rules and is not intended to cover every eventuality and should not be treated as providing legal advice. If this area is something you are interested in looking at, please do not hesitate to contact one of our Private Client team who will be more than happy to discuss this with you further to ensure you take full advantage of the new rules.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.