When an investor dies, Peter Shipp, technical director of savings schemes at Tisa, says their Isa ceases to be an Isa from the date of death.
The assets held within the Isa then forms part of the deceased’s estate and are subject to tax from the date of death onwards. This means they may be hit with inheritance tax if total assets exceed the nil-rate band.
But in the Autumn Statement 2014, HM Treasury announced proposals allowing surviving spouses to ‘inherit their partner’s Isa tax advantages when they die’.
Tisa’s Mr Shipp says it should be made clear that this is not a matter of transferring the Isa to the surviving spouse: treatment of the deceased’s Isa remains unchanged.
Mr Shipp points out the new facility would provide the surviving spouse or civil partner with a special subscription allowance allowing them to put additional cash into their own Isa, based on the value of the deceased’s Isa on the date of death.
This special subscription allowance does not count towards the spouse’s annual subscription limit for the year in which it is made.
Ms Shipp says: “It is a requirement that the special subscription is paid into an Isa that the spouse holds (or opens for the purpose) with the Isa manager with whom the deceased’s Isa was held.”
In December 2014, HM Treasury clarified the inheriting spouse will be allowed to invest as much into their own Isa as their spouse used to have via an additional allowance, as well as their normal annual Isa limit.
Spouses will be eligible to claim this additional allowance where the Isa holder has died on or after 3 December 2014. Spouses will be able to claim their additional Isa allowance from 6 April 2015.
A spokesman for HM Treasury states this is not related to the assets in the Isa other than being determined by their value at date of death. The actual assets will be distributed in the usual way according to the will.
The spouse will be entitled to the additional allowance even if the assets have been left to someone else, or have been used to meet expenses from the estate. No one else will be entitled to this allowance, even if they have received the assets from the Isa.
The intention is that there should be no additional burden on the personal representatives (executors) of the deceased.
Until 6 April 2015 it will not be possible for customers to make use of this additional Isa allowance.
Deaths should continue to be registered with the Isa provider in the usual way, and the usual tax treatment applies. However from 6 April 2015 rules will state the spouse can then make payments into their Isa as they see fit, either:
1) with their own cash (whether inherited or not); or,
2) with non-cash assets that were held in the deceased’s Isa on date of death, and which have been distributed to the spouse.
It is proposed that non-cash investments that have remained intact with the Isa manager will be able to be held in the Isa of the surviving spouse/civil partner.
Managers who routinely liquidate investments when notified of a death may therefore wish to reconsider this practice, HM Treasury said. If assets are sold, the surviving spouse will only be able to pay cash into their Isa.
Although the transfer to a spouse is exempt from inheritance tax, this existing exemption is limited to £325,000 for transfers to a non-UK domiciled spouse.
