Inheriting ISAs : Changes to the ISA Rules on Death

23 Apr


Some are still unaware of the change in legislation.

Did you know that you can inherit your partner’s ISA savings? New rules came into being in April 2015 that mean ISA assets can now be passed on to spouses or civil partners and retain their tax-friendly status, and although it may not be nice to think about, it could make a huge amount of difference should the time come.

If you save into an Isa, it means you can grow your money in a tax efficient way. Unfortunately, when you die, this benefit dies with you – unless you’re married or in a civil partnership.

New rules introduced by the government enable your surviving spouse or civil partner to inherit your Isa savings when yoU die.


Why The Change?

Under the previous system, when someone died, any savings held in an ISA automatically lost their tax-free status. This meant that the surviving partner would have to start paying tax on any returns or income earned from it, which could add up to a significant sum if the ISA holder had been saving for many years.

The system was widely thought to be unfair, particularly given the fact that couples tend to save from joint incomes – they’d have to pay tax on money they thought was protected, and thousands of people were caught by these unexpected tax charges every year. Happily, things have now changed.


Pass on the benefits

The rules mean that if an ISA holder dies, the surviving spouse or civil partner will be able to inherit the ISA and retain its tax benefits. This is in the form of an additional allowance – the surviving partner is given an ‘additional permitted subscription’ (APS), a one-off ISA allowance that’s equal to the value of the ISA at the date of the holder’s death, which won’t be counted against the normal ISA subscription limit but will instead be added on to the survivor’s own ISA limit.

In other words, you’ll be entitled to an additional allowance that would cover the value of your partner’s savings as well as your own. For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £65,240 (the value of your partner’s savings and your own ISA allowance for the 2016/17 tax year, which stands at £15,240).

Essentially, the rules mean that the tax-efficiency of the ISA won’t be lost, and that you’ll be able to benefit from the money that could well have been saved together. The changes have been specifically designed to ensure that bereaved individuals will be able to enjoy the tax advantages they had previously shared with their partner, offering more flexibility and a much fairer outcome.

“Approximately 150,000 married ISA holders die each year, so these changes will benefit spouses or civil partners by increasing the amount that they can save by offering the tax advantages in an ISA wrapper,” said Carol Knight, operations director at TISA. “We see it as a much fairer outcome and one we have long advocated. [Surviving partners could have] lost out significantly under the previous rules whereby investments held by deceased ISA savers lost their tax-free status… Allowing ISA savings to be transferable will enhance flexibility and will act as a further incentive to save within these vehicles.”

Rules at a glance

  • Anyone whose spouse/civil partner died on or after 3 December 2014 is eligible, and the APS could have been claimed since the start of the 2015/16 tax year.
  • The rules apply irrespective of the size of the deceased’s ISA pots – no matter how much they’d saved in an ISA, you’ll have that amount as an additional allowance.
  • In the event that more than one ISA was held by your partner, the pots will be combined to give an overall additional subscription amount that you can claim.
  • APS allowance subscriptions (referred to as payments) can be made to a cash ISA and/or a stocks & shares ISA, either with the deceased’s ISA provider or with an alternative that will accept APS subscriptions (not all will).
  • Some ISA providers will allow payments to be made in instalments whereas others only allow a lump sum, so make sure to check.
  • Chances are, arranging your new allowance won’t be at the forefront of your mind on the death of your partner. In most cases, at least for subscriptions made in cash, the allowance is available for three years after the date of death.
  • ISA providers will require key information and personal details from the spouse/civil partner to open a qualifying ISA, and they’ll also require an application form to use the APS allowance.
  • The APS allowance can be transferred to another ISA provider, subject to the new provider’s acceptance.
  • It can only be transferred once and only where no subscriptions have been made under the allowance. But, after an APS allowance payment has been made, the cash and/or investments related to that subscription can be transferred to another ISA.




How are ISA Allowances Inherited?
Anyone whose spouse or civil partner died on or after 3rd December 2014 is eligible for a one-off additional Isa allowance equivalent to the value of the deceased person’s Isa at the time of death.

This is referred to as an ‘additional permitted subscription,’ or APS allowance.

Say, for example, that you’d saved up £50,000 in your Isa when you die. Your spouse will be able to make an additional contribution to their Isa of up to £50,000, in addition to their own Isa allowance for the year (£15,240 in the 2015/16 tax year).

This allowance is regardless of what’s in your will. Which means that even if the money is left for someone else to inherit, such as your son or daughter, your partner is still entitled to an increased allowance equivalent to the value of your Isa assets on the day of death.

So if you left £50,000 worth of Isa assets to your child, your partner would still be entitled to an increased Isa allowance of £50,000, although they would be using their own money to fund it.


Where can I invest the Isa savings I’ve inherited?
The surviving partner can choose where to transfer the inherited savings. They can:

  • Keep the money with the original Isa provider
  • Put the money with their own Isa provider
  • Open up a new cash Isa or a new stocks and shares Isa and place the additional subscription there
  • An APS allowance can only be transferred once but if there is more than one Isa to inherit, you’ll have an allowance with each provider.

Under the Isa rules, you can only have one cash Isa and one stocks and shares Isa per tax year. However, you won’t breach these rules if you open up an Isa for the sole purpose of transferring inherited savings.

So, you could have some money in your own cash Isa with one bank, and place the Isa savings you’ve inherited in another bank.

Once the transfer has been made, the normal Isa rules apply and the money is treated as previous years’ subscriptions.


Do Isa providers have to accept payments?
In short, no.

Isa providers aren’t obliged to accept APS allowances – so you may not been able to deposit inherited savings with your own Isa savings.

The 11 providers below, although could change their approach and are not the only but rather a few I can detail. This could change and there will be others. It’s just to demonstrate that even though the legislation has changed ISA providers may not offer the flexibility – please check with your provider their stance on this. I have found, these do not accept the additional allowance :

  • Bath BS
  • Buckinghamshire BS
  • Harpenden BS
  • Leeds BS
  • Manchester BS
  • Mansfield BS
  • Melton BS
  • Mowbray BS
  • GE Capital Direct
  • Furness BS*
  • Al Rayan Bank*


*Furness BS and Al Rayan Bank have said they are planning to accept inherited Isa savings in the near future.


Is there a time limit for additional Isa subscriptions?
When someone dies, their estate has to be administered. This means that all of their assets have to be gathered and debts must be repaid, before it can be distributed to the people named in the deceased’s will.

During this period, interest earned on savings in their Isa is taxable, and income tax may need to be paid.

To help couples keep the tax benefits of their savings, the increased Isa allowance can be claimed by filling out an application form and is available for three years after the date of death, or if longer, 180 days after the estate has been administered.


What happens when you inherit a stocks and shares Isa?
Stocks and shares Isas are treated in the same way as cash Isas under the reforms, with surviving spouses entitled to make additional subscriptions into either a stocks and shares Isa or a cash Isa.

There are two ways for a surviving partner to use their inherited stocks and shares allowance:

  • All of the investments – such as funds and shares – could be sold, and the resulting cash can be used to open a new Isa. This is known as a ‘cash transfer.’
  • Alternatively, the investments can be transferred directly without being sold. This is known as an ‘in specie’ transfer.
  • Additional subscriptions made via an ‘in specie’ transfer must be made within 180 days of the surviving partner inheriting the funds and can only be made to the deceased Isa provider.


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