Keeping it in the family

When an ISA account holder dies, usually the ISA account ends and the tax free status of the investment terminates. However, provided certain conditions are satisfied, new HMRC regulations allow spouses and civil partners to inherit ISAs on death and continue to benefit from the tax free status.

An individual can invest up to £15,000 in a tax year in cash and non-cash ISAs. For the tax year 2015-16 this allowance will increase to £15,240. This allowance cannot be shared or transferred between individuals but, because ISAs are free of income tax and capital gains tax, they have still been a popular way of holding or investing savings. Historically anyone inheriting monies or stocks and shares which the deceased had owned in an ISA wrapper, has only been able to reinvest those funds in ISAs by using their own annual allowances over time.

However, the surviving spouse or civil partner of an ISA account holder who dies on or after 3 December 2014 will be able to increase their own ISA allowance for the tax year in which the death occurred by an amount equal to the value of the deceased’s ISA (or the aggregate value, if the deceased owned more than one ISA account).

What are the conditions and time limits?

Certain conditions will need to be satisfied. The surviving spouse or civil partner must:

• Already have an ISA account which is managed by the same account manager as the deceased’s account (unless HMRC authorise another account manager to accept the subscription).
• Have been living with the deceased account holder at the date of death and not be separated by a court order or a deed of separation.
• Subscribe for the increased ISA allowance within the following time limits:
  • For cash ISAs, within the later of three years after the deceased’s death or 180 days after completion of the administration of the deceased’s estate.
  • For stocks and shares ISAs, within 180 days after the deceased’s personal representatives distributed the stocks and shares to him or her.
  • For stocks and shares ISAs, have inherited the stocks and shares ISAs from the deceased to enable them to subscribe for the extra allowance.

How does it work? An example

1. Mrs Smith has a stocks and shares ISA of £10,000 and a cash ISA of £5,000 with ISA Subscriber Ltd.
2. Mr Smith has a stocks and shares ISA worth £25,000 and a cash ISA worth £35,000, also with ISA Subscriber Ltd.
3. Mr Smith dies on 23 March 2015 and from this point the tax efficient status of his ISAs is lost.
4. Under the terms of Mr Smith's will his son inherits "all the stocks and shares in my ISA account number 12345 and all the cash in my ISA account number 5678 with ISA Subscriber Ltd at the date of my death". Mrs Smith inherits the rest of his estate.
5. Even though she did not inherit the funds in Mr Smith's cash ISA, Mrs Smith could, if she wanted to make further cash ISA investments, subscribe for an additional one-off ISA allowance of £35,000 (in addition to her own allowance) within the requisite time limits.
6. However, because she did not inherit the stocks and shares from her husband’s ISA, Mrs Smith cannot subscribe for an extra £25,000 stocks and shares ISA allowance.

Although the draft regulations are still subject to consultation, they are expected to be finalised in the coming weeks. As can be seen from the example above, these regulations will give rise to planning opportunities for surviving spouses/civil partners, and may also affect how clients wish to leave their ISA assets under their Wills.