Legislation introduced in 2015 allowed Isa account holders to pass on their investment to a spouse tax free.
The rules state that for deaths on or after 4 December 2014, savers and investors have been able to pass the value of their Isa onto their spouse after death.
What passes to the surviving spouse isn’t the money in the Isa itself, but an additional Isa allowance – equal to whatever their spouse held in Isas at the time of their death. This is known as an additional permitted subscription allowance.
But the valuation of the Isa was conducted on the day of death, meaning that any gains made by the investments between the date of death and the estate being wound up are liable to tax.
It may also mean the asset growth between the two dates cannot then be placed back into an Isa.
But from 6 April this year, this changes, and the Isa of the deceased person will become a “continuing account of a deceased investor”, and remain wrapped within the tax efficient structure until after the will has been probated.
Sarah Coles, personal finance analyst at Hargreaves Lansdown said: “Unfortunately, the administration of a complex estate can take months, or even years. During this time, the Isa investments may continue to grow.
"If, for example, you have a £1m Isa portfolio, growing at 5 per cent a year, you could end up with around £160,000 of growth over three years.”
She added: “During the administration of the estate, growth in the Isa is being exposed to taxation. Second, the fact that the assets may be growing and the Isa wrapper isn’t means the surviving spouse may not be able to rewrap all of those assets in an Isa once the administration of the estate is complete.”
“The changes in April will cure both these headaches, and iron out what has been a clunky and potentially expensive wrinkle in the rules.”
At the moment the allowance that is transferred to the surviving spouse is equal to the value of the Isa on the date of death. The intention of this legislation is that from April 2018, the APS will normally be the value of cash or investments passed on, or the value of the Isa on the date of death – whichever is higher.
However Philip Milton, who runs Philip Milton and Co, an advice firm in Devon, said there are a number of other problems advisers face when a client dies.
For example the authorisation to act for a client stops, yet the adviser may not think it is in the best interest of the client estate for no action to be taken on the portfolio.
He added many advisers choose to liquidate a portfolio as soon as they know a client has died.
Mr Milton said “this can’t be right” and wonders if many clients are aware that this might happen.
The issue of valuing the estate for probate is less important than the question of how the investments are managed in the period immediately following the death of a client, he added.
David.Thorpe@ft.com
