The focus of Isa tax benefits tends to be on the income tax and capital gains tax (CGT) advantages. From a death taxes perspective, the inheritance tax (IHT) treatment of an Isa depends on the investments held within it and to whom the proceeds are paid – assets passed to a spouse or registered civil partner, or to a registered charity or political party are free from IHT. All other transfers are potentially subject to IHT, depending on the size of the estate.
Business property relief
The majority of assets held within Isas are subject to IHT. Since August 2013, Aim shares have been a qualifying investment for Isa wrappers. Certain Aim shares qualify for the business property relief (BPR) IHT exemption provided they are held for two years or more. The holding period starts from the date of original acquisition so Aim shares can be moved into an Isa via bed & Isa without restarting the two-year clock.
While this provides the potential for an entirely tax-free investment both during lifetime and on death, in reality it is not all plain sailing.
Generally speaking, BPR is not available where the business mainly deals in land or buildings or the making or holding of investments. It is also important to note that the qualification status for BPR is assessed at the date of death and may have changed since the date of investment.
Inheritable Isas
Since 6 April 2015, the value of accumulated Isas can be paid into an Isa of a surviving spouse or civil partner with no upper limit and without affecting their own Isa allowance. This applies to deaths on or after 3 December 2014. This provides a much-needed tax break for married couples who typically manage their family money together.
The current system is a little clunky, but this was to ensure it could be implemented in a short period of time. This tax break is offered using an additional permitted subscription (APS).
Isa tax status on death
To understand the reasoning behind the APS it is important to understand that the tax-free status of an Isa is currently lost at the date of death. From that date, the cash and investments held become taxable in the hands of the personal representatives until probate and distribution.
This means that surviving spouses receive taxable assets outside an Isa wrapper and are therefore subject to taxes they would not have needed to consider while their spouse or partner held the Isa.
The simple solution would appear to have been to just retain the Isa status from the date of death. However, there was insufficient time to bring in the secondary legislation required prior to the beginning of the 2015/2016 tax year. Further to this, in the 2015 Autumn Statement, chancellor George Osborne announced that the Isa status would be maintained for Isa investments during the estate administration period. This change is expected to take effect from 6 April 2016 after a technical consultation with Isa providers.
Additional permitted subscription – how it works
The APS is equal to the value of all Isa accounts held by the deceased on the date of death. Where an investor held Isas with several companies, a separate APS will be available from each.
It is available to anyone whose spouse or civil partner died on or after 3 December 2014, where the couple were not legally separated or likely to become legally separated (if either spouse was in a care home this would not generally be considered as legally separated). The APS is not limited to UK residents, so the spouse or civil partner of an individual who moved abroad and still held Isas is entitled to an APS.
The APS is separate to the Isa allowance (£15,240 for the 2015/16 and 2016/17 tax years). The surviving spouse or civil partner can use their Isa allowance in the normal way, separate to any APS.
Registering an APS
After receipt of the death certificate, the Isa manager will be able to inform the executor of the existence of an APS and its value. The Isa manager also requires a declaration confirming the details of the surviving spouse or civil partner, which must include the date of marriage or civil partnership. The APS will then be registered to the surviving spouse or civil partner.
The APS can be used immediately from the date of death and before asset distribution, although the likelihood is that registration will not happen for at least a couple of weeks. The majority of users will need to wait for asset distribution (which usually requires a grant of probate) before having the means to use the additional allowance.
The APS does not need to be used all at once, so a surviving spouse or civil partner could make several contributions to make use of their APS. Please note that Isa managers often require separate APS Isa applications and APS arising from the same Isa can only be made to a single Isa manager.
Making use of an APS
Cash: Investors can make a cash contribution using their own cash or cash inherited from the deceased into an Isa of their choice. This could be to an existing Isa of their own or an Isa with a new manager. They should first check that the Isa manager will accept an APS as some do not.
Investments (in-specie transfer): Investments held within the deceased’s Isa can also be transferred into the surviving spouse or civil partner’s Isa to use some or all of their APS. These investments can be transferred directly without needing to be sold.
Assets can only be transferred directly into the Isa with the same company with which the deceased held their Isa. Other investments that form part of the estate cannot be transferred into the Isa and must first be sold and the proceeds used to make a cash contribution.
The value of the assets at the time the transfer is made counts towards the APS.
Where the value of any inherited Isa investments is less than the APS, a top-up payment can also be made with cash. Where the value
of any inherited Isa investments is greater than the APS (because they have risen in value since the date of death) investments can only be transferred into the Isa up to the value of the APS.
APS time limits
For cash subscriptions, the APS is available for three years after the date of death, or for up to 180 days after administration of the estate is complete (that is, when the personal representatives have distributed the assets of the estate), whichever is the later. This is known as the ‘permitted period’.
For subscriptions made by transferring investments, the permitted period is shorter. Here subscriptions into the Isa must be within 180 days of the beneficial ownership of those investments passing to the surviving spouse or civil partner. In both cases, for deaths between 3 December 2014 and 5 April 2015, the permitted period begins on 6 April 2015.
Danny Cox is a chartered financial planner at Hargreaves Lansdown
