ISAs  

Spotlight: The changes to Isa death benefits

Spotlight: The changes to Isa death benefits

The main attraction of an Isa is that interest, dividends or gains are exempt from UK income and capital gains tax. These tax advantages are considerably more advantageous for higher and additional rate taxpayers than for basic rate and non-taxpayers. 

However, even non-taxpayers benefit from not having to declare income and gains within the Isa, and their investments will remain sheltered if they pay a higher tax rate in the future. 

On the death of the investor, the Isa wrapper ceases to exist. The Isa manager could choose to remove the wrapper or move the assets to a non-Isa account. 

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The Isa becomes part of the estate and will be distributed according to the will or intestacy. There is no exemption from inheritance tax (IHT). 

Any gains due to disposals before death will remain exempt, as will any interest or dividends payable before death. Where a life insurance policy is held within an Isa, the policy will be treated as remaining there until a valid claim is made. However, any interest paid due to a delay in paying the claim would be taxable. 

Any interest or dividends arising after death are potentially taxable on the estate. 

The recipient of the shares will be treated as if they acquired them with the cost price on the date of death (see Box 1). 

 

Aim and BPR

Since August 2013, it has been possible to hold shares traded on Aim within an Isa. Where these shares have been held for at least two years before death, it is possible to claim 100 per cent business property relief (BPR) against inheritance tax (IHT). 

Although BPR relief can be a useful IHT planning tool, it is questionable as to whether there is a significant advantage to holding these assets within an Isa. 

Aim shares are unlikely to produce high levels of income. If the plan is to hold these shares until death, there will be no capital gains tax (CGT) advantage as the cost price will be rebased on death. 

 

APS 

The Additional Permitted Subscription (APS) was introduced on 6 April 2015 for deaths that occurred on or after 3 December 2014, provided that the deceased and the spouse were living together at the date of death.

An APS allows the surviving spouse to make a subscription up to the value of the deceased’s Isa(s) at their date of death without it counting towards the normal Isa limits. Although it will be possible to use the APS to make subscriptions to the Lifetime Isa, they will still count towards the £4,000 limit. 

The APS can be made with the manager who held the deceased’s Isa or it can be made to another manager. No manager is obliged to accept an APS. 

If the surviving spouse has inherited Isa assets then it may be possible to contribute these in-specie (directly moving the assets into the Isa without selling them first), provided it is to the same manager. 

This avoids having to sell the assets to make a cash subscription.