ISAs live on after death!

New rules mean that assets can now be passed on to spouses or civil partners and retain their tax-exempt status in cases where a spouse dies after 3 December 2014 – but an election needs to be made!

Under the previous rules ISA savings could be passed on to beneficiaries named in a will or through the rules of intestacy, but automatically lost the tax-exempt ‘wrapper’ enjoyed during life.

 

Inherited ISA allowance – additional permitted subscription (APS)

Also it is not necessary to inherit the spouse’s ISA in order to acquire the benefits associated with it. Even if the surviving spouse does not receive the ISA assets they are able to access ISA allowances equivalent to the value of the ISA which has been inherited by someone else.  This is known as the additional permitted subscription (APS). The APS is not restricted to a one-off lump sum payment and can be utilised in instalments but there is a time limit of three years after the date of death, or if longer, 180 days after the estate has been administered, for the increased ISA allowance to be used.

 

Estate tax issues

During the period of administration the estate will be liable to tax on the assets in the ISA. It is only when it is passed to the spouse that it returns to its tax-exempt status.

 

Interaction of APS with recipient’s ISA allowance

The APS does not dilute the normal ISA allowance and a recipient can still contribute up to £15,240 (2016/17) in addition to the value of the inherited APS allowance – although usually it will make sense to allocate the allowance that will expire first.

 

Example – Mr Bowers

Mr Bowers has built up ISA savings of £50,000 during his lifetime and his will dictates that the ISA will be left to his son.  Mr Bowers also has two flats that are worth £35,000 each and he leaves these to his wife.

He dies on 31 December 2014.

The estate is administered quickly so Mrs Bowers has until 31 December 2017 to utilise the inherited APS allowance.

Mrs Bowers sells the properties for £45,000 each in 2016/17 and 2017/18 respectively and resolves to use the proceeds to maximise her ISA contributions.

In the 2016/17 and 2017/18 tax years Mrs Bowers can make the following ISA investments from her sale proceeds:

£15,240             Mrs Bower’s annual ISA allowance

£29,580             APS allowance

£45,000            Total ISA subscription in 2016/17

 

£15,240             Annual ISA allowance

£20,420             APS allowance – subject to 31 December 2017 deadline

£35,660            Total ISA subscription in 2017/18

 

In the above example the subscription was made using funds from inherited assets, however the APS is not restricted to inherited funds and could have been made by Mrs Bowers from any other cash that she had available.

 

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