Life After Death – The Lesser Known Benefits of ISAs

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As of 6th April 2017, the annual ISA allowance in the UK rose to £20,000. With this dramatic increase, the previous contribution level having been set at an annual maximum of £15,240, ISAs have once again been brought into the spotlight from a saving and planning perspective.

Here we look at a couple of the lesser known facts surrounding ISAs – particularly in relation to their uses and benefits following the death of an ISA account holder.

Inheriting an ISA

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’ status enjoyed during life.

The new rules, brought in on 6 April 2015, allow the surviving spouse of a deceased ISA holder (including a civil partner) to not only inherit the cash from the ISA, but also to then use the funds, or funds from elsewhere, to make additional contributions to an ISA on top of their own annual subscription limit. This is known as an additional permitted subscription (APS).

Unlike a personal ISA allowance, the amount that can be invested via APS does not ‘reset’ at the start of each tax year but rather is a capped amount equivalent to the amount accumulated by the deceased in ISA wrappers prior to their death. The time period for using an APS is restricted to three years following the date of death, or if later, 180 days after the estate has been administered, although the rules differ slightly where an in specie transfer of non cash assets is elected.

APS allowances – what are the rules?

The rules are surprisingly flexible and are available whether or not the surviving spouse inherited the deceased’s ISA assets. So in theory, the ISA itself could be passed on to other family members whilst the spouse still gains the additional permitted subscription allowance up to the total value of the deceased’s ISA upon death.

Additionally, there is no cap on the potential APS allowance – the rules apply irrespective of how much the deceased had managed to save in an ISA.

When it comes to actually using the APS, the funds invested can come from inherited wealth or any other form of cash available to the surviving spouse. The surviving partner can choose where to transfer the inherited savings – either into a cash ISA or a stocks and shares ISA. 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.

It is worth noting that during the period, in which the estate is being administered, the funds from the ISA lose their tax free status and therefore any interest earned on savings will become liable to taxation.

Gresham clients will be well aware of the benefits of saving into an ISA from a long-term planning perspective and particularly the benefits of having a hybrid of pension/ISA pots when it comes to drawing an income for retirement. The death benefits associated with ISAs are lesser known, yet provide a tax friendly means of passing on wealth to a spouse in addition to a potentially substantial further tax free environment for them to use to accumulate wealth. This provides further options for married couples and can come as a particularly welcome bonus to those who are widowed unexpectedly early.

For further information about the rules in relation to inherited ISAs, please contact your usual financial adviser.

Example – Mr and Mrs Jones

Mr and Mrs Jones were cautious spenders and Mr Jones had managed to save £60,000 into ISAs held in his name. Upon his death, it was written into his Will that his ISAs be split between the couple’s two children.

Mr Jones passed away at age 61 on 2nd January 2017. As the estate is fairly straightforward to administer, it is anticipated that Mrs Jones will have until 2nd January 2020 to utilise the additional permitted subscription (assuming a cash subscription).

In theory, Mrs Jones’ total annual ISA contributions could therefore look like this:

£20,000 Personal ISA allowance
£30,000 APS allowance
£50,000 Total allowable ISA subscription

£20,000 Personal ISA allowance
£10,000 APS allowance
£30,000 Total allowable ISA subscription

£20,000 Personal ISA allowance
£20,000 APS allowance (funds must be transferred in by 2nd January 2020, assuming a cash subscription)
£40,000 Total allowable ISA subscription

NB. The amount that can be contributed via the APS can vary each year and can be made via instalments or lump sum payments.

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