TaxFeb 27 2018

Death, taxes and Isas

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Death, taxes and Isas

Within an Isa, interest, dividends and gains are exempt from UK income and capital gains tax (CGT). 

On the death of the investor, the Isa wrapper ceases to exist and the funds become part of the estate to be distributed according to the Will or intestacy, with no exemption from inheritance tax (IHT). 

For deaths between 3 December 2015 and 5 April 2018, an additional permitted subscription (APS) allows the surviving spouse or civil partner to make a subscription up to the value of the deceased’s Isa(s) at their date of death, without it contributing towards the normal Isa limits. 

As the Isa ceases on death, any interest, dividends or gains that arise after death and before the APS is used are potentially subject to income tax or CGT. 

(Please note: any reference to spouse in the following also includes a civil partner.)

Isa extended beyond death

Any Isa held by an investor who dies on or after 6 April 2018 will become a “continuing account of a deceased investor”. 

Although the ‘continuing Isa’ will not be able to receive any further subscriptions, it will retain the Isa tax advantages and, subject to the Isa manager’s terms and conditions, can continue to be managed. 

The continuing Isa will still be potentially subject to IHT. This will continue until either the completion of the estate administration, the closure of the continuing Isa, or the third anniversary of death – whichever comes first. After this period the Isa wrapper will be removed. 

The introduction of a continuing Isa removes the gap between the date of death and the date that the APS is used, but it does complicate the APS valuation. 

APS valuation: single Isa

If the deceased investor had a single Isa, the surviving spouse is entitled to an APS, which is the higher of the Isa value at the date of death or the value when the Isa ceased to be a continuing Isa. 

If the spouse wanted to use part of the APS before the Isa ceases to be a continuing Isa, then this fixes the APS value as at the date of death. See Box One

APS valuation: multiple Isas

If the deceased investor had multiple Isas, the surviving spouse could choose to use either the APS value at date of death, or the value at date of closure. This is with the proviso that they must use the same date for all Isas held with the same Isa manager – it would not be possible to use the date of death for one Isa and the date of closure for another. See Box Two

Lifetime Isa

If a Lifetime Isa (Lisa) investor dies, the value of the Lisa includes any government bonuses due to be paid on subscriptions or payments made before the date of death. 

A surviving spouse can use an APS to pay into their own Lisa. Although this payment would not count towards the £20,000 Isa allowance, it would count towards the £4,000 Lisa allowance. 

The surviving spouse would still need to meet all other Lisa requirements, including being below 40 if they do not currently have a Lisa, or under 50 if they do. 

In-specie APS

If the surviving spouse decides to use their APS with the manager that held the deceased’s Isa, and the surviving spouse has inherited these assets, then the surviving spouse can make an in-specie APS. This avoids having to sell the assets, make a cash subscription using the APS, and then repurchase the same assets within the Isa. 

Provided this in-specie subscription is made within the time limit, it should mean the value of the assets will automatically be within the APS limit. See Box Three

Transferring an APS

A surviving spouse could have multiple APS allowances with multiple Isa managers. 

The surviving spouse could choose to transfer all these allowances to a new Isa manager. Should they do so, the receiving Isa manager will combine the separate APS allowances into a single APS allowance. 

If the surviving spouse transfers their separate APS allowances to an Isa manager that is already holding an APS allowance, then the receiving Isa manager will need to monitor the transferred allowances separately to the APS allowance that they already hold. This is because the surviving spouse could potentially make an in-specie subscription with the existing APS allowance, but not with the transferred allowance. 

As soon as some or all of an existing APS allowance has been used, then the Isa manager can combine the APS allowances into one APS allowance. 

A simplified process?

So will these changes simplify the APS process for surviving spouses and civil partners? 

The conclusion must be yes, although as always there are quirks, detailed above, that may well have to be taken into account.

Phil Warner is head of technical at Hargreaves Lansdown