The humble ISA is one of the most well-known and widely used savings vehicles in the UK. Along with pensions, it’s also one of the most tax-efficient. Though as George Osborne introduced the ‘inheritance ISA’ in his autumn budget statement (December 2014), very few eligible widows and widowers have taken up the new offer.
The Inheritance ISA
The inheritance ISA – officially known as an ‘additional permitted subscription’ – lets a widow or widower inherit the tax-free status of savings held within the account. This makes ISAs more akin to pension accounts under the new rules.
Under new rules, anybody can save up to £15,240 per year into an ISA (either as cash or shares), with the interest gained on the allowance being completely free of tax. Should your spouse or civil partner pass-away, you are now able to inherit an allowance equivalent to the value of their tax-free pot.
But despite seeking financial advice from their banks, many are either being told conflicting information about the process, or simply aren’t claiming the allowance at all.
Lawrence had £60,000 built up in a cash ISA. It earns 2% interest, the equivalent of an additional £1,200 tax-free each year. When he died, his wife June inherited the cash invested in the ISA.
Under previous rules, the tax-free allowance would have been lost. This would have meant June – who is a higher rate tax payer – would have been required to pay £480 in tax on the £1,200-worth of interest.
Now, because Lawrence passed away after 3 December 2014, June can inherit his ISA as she normally would under inheritance rules, but the tax-free interest allowance will remain.
June is just one of approximately 150,000 people who will be affected by these changes, by getting the opportunity to inherit this tax-free allowance.
Your ‘Need to Know’ Guide
- Contact the ISA provider following your spouse’s death: the ISA is not inherited automatically.
- The tax-free allowance is not transferrable: it can only be used by you.
- The ISA allowance is the equivalent to your partner’s ISA value at the time of death. Interest earned and investments’ values will be calculated on the date of death.
- The ISA allowance must be claimed and transferred within 3 years of your partner’s bereavement, or 180 days after the completion of the administration of the estate – whichever is later.
- A new ISA can be opened with the total value of the deceased’s ISA as a tax-free allowance.
- Your own ISA can be topped up with the deceased’s ISA value provided you are with the same provider.
- Investment fund ISAs will usually require the investments to be sold before you can inherit the value and the tax-free allowance.
- Even if the assets within the ISA have been left to another beneficiary or spent, you are still entitled to the ISA’s value as a tax-free wrapper. This is especially useful if the ISA funds have been used to fund funeral costs.
- Inheritance ISAs can be transferred to different providers in the future if required, for example if there are better interest rates to be found.
This article was written with the help of Ryan Smith, part of the content development team at Local Financial Advice, connecting people with local financial advisors in their area.