ISAs - the transfer of tax breaks

26th January 2015

The Chancellor announced in the Autumn Statement that ISAs will be able to be passed on death to a surviving spouse or civil partner without losing the tax breaks. This has made this tax-wrapper even more valuable and should prompt married couples (and registered civil partners) to review their Wills or risk missing out.

The change is subject to legislation being finalised, but The Treasury has outlined the new rules. The surviving spouse will be given an additional one-off ISA allowance, equal to the value of the deceased's ISA holdings. This enables the assets which were in a spouse's ISA to continue to be sheltered into an ISA in their survivor’s name.

How it will work - an example

  1. An investor holds £60,000 of ISA savings and investments and dies on 07 January 2015.
  2. For the period from the date of death up to the distribution following the grant of probate, the benefits of the ISA tax wrapper are lost and the £60,000 becomes subject to income tax on any interest or dividend income generated, or capital gains tax where gains are made.
  3. Following probate, the value represented by the ISA passes to the surviving spouse.
  4. With effect from 06 April 2015, the survivor has a one off opportunity to shelter the £60,000 (in this example) into an ISA in his/her name in addition to his/her own £15,240 ISA allowance, giving a combined allowance of £75,240. This could be subscribed to a new ISA or to an existing ISA.

Will this save inheritance tax?

No, this change does not save inheritance tax.

The value of ISAs are subject to inheritance tax on death (with one main exception - where ISA investments qualify for business property relief, such as qualifying AIM shares that have been held for a two year period.)

However transfers of any assets between spouses on death are usually IHT free (provided the surviving spouse is UK domiciled). The change intends that the tax advantages of an ISA can be passed on to the surviving spouse, and there is no need give inheritance tax exemption as no such tax usually arises in these circumstances.

What might investors do now?

This change is just one of a raft of new rules introduced this year which may make ISAs more appealing to investors.

In order to benefit from this new tax break, it might be wise for couples to consider their Wills to ensure any ISAs are indeed left to each other.

All content is for general guidance only. It provides an outline, and may not include points which are important in your case. You should not rely on this blog without taking individual advice based on the full facts of your case. The information given was correct at the time of publication.

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