A spouse who inherits their partner’s Isa will be able change to a different type of Isa, cash or stocks and shares, as well as change providers if they wish, the Treasury has confirmed.
In final rules published yesterday (12 March), HM Revenue and Customs and the Treasury confirmed a U-turn on a proposal in the draft rules to limit the new Isa allowance which a surviving spouse would inherit to their existing Isa manager.
In last year’s Autumn Statement, the chancellor announced that Isas would be coming into line with the new pension ‘death tax’ benefits. However, the rules implied an individual inheriting an Isa would not be able to transfer to a new provider.
Under the rules, if an Isa holder dies, they will be able to pass on benefits to their spouse or civil partner via an additional Isa allowance, available from 6 April 2015.
The surviving spouse or civil partner will be allowed to invest as much into their own Isa as their spouse used to have, in addition to their normal annual Isa limit.
Danny Cox, Chartered financial planner at Hargreaves Lansdown, said originally it was proposed that the surviving spouse had to use the same Isa manager as the deceased’s Isa, “but now the guidelines confirm that the spouse can use the Isa of their choice”.
Mr Cox warned the process will be “a little clunky” but as a short-term fix it made a lot of sense for HMRC to finally allow a dead spouse’s Isa to be transferred to another manager.
He said HMRC clarified Isa managers will not have to accept the subscription if they do not want to and spouses still have the option of sticking with the existing Isa provider and then transferring later they wish.
Under the new system, Mr Cox said the surviving spouse will be given an additional, one-off Isa allowance, equal to the value of the deceased’s Isa holdings. This will be known as the ‘additional permitted subscription’.
From the date of death to the distribution of the value at probate, the Isa tax wrapper status is lost and the money becomes subject to income tax on any interest or dividend income generated or capital gains tax where gains are made.
The value of the Isa may increase or decrease from the date of death to the date of distribution, but Mr Cox said the special one off Isa allowance will be for the value of the deceased’s Isa at the date of death.
The rules have not been changed for unmarried couples who still cannot benefit from this tax break and the APS cannot be used by anyone other than the spouse or registered civil partner.
To learn more about Isas, and earn CPD, read FTAdviser’s Guide to Isas and Pension Freedoms.