New ISA legislation on death: ironing out a potentially expensive wrinkle in the rules
- Since April 2015 you have been able to pass on the value of your ISA to your spouse on death. New legislation irons out a wrinkle in the rules that has meant the allowance you passed on wasn’t always large enough to contain all the assets you’d held in ISAs before your death.
- The problem comes down to the growth of your ISA investments between the date you die and the day the administration of the estate is complete. New legislation wraps growth into the allowance you pass on.
- It also means that growth in the ISA while the estate is going through administration remains tax-free during the process.
This week, the government published legislation which will change the rules that apply to ISAs when you die. The full legislation comes into effect on 6 April 2018, and can be found here.
Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown:
"Committed savers and investors have been able to build up a sizeable ISA portfolios – sometimes up to £1 million or more. Being able to pass on the value of your ISA to your spouse has been a godsend for their family, who can ensure this portion of their savings and investments stay in a tax-efficient environment."
"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 £1 million ISA portfolio, growing at 5% a year, you could end up with around £160,000 of growth over three years. This causes two headaches."
"First, 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 that 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."
Rules regarding passing ISAs on
For deaths on or after 4th 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. It’s known as an Additional Permitted Subscription allowance – or APS.
Under the current rules, the cash or investments in the ISA itself don’t remain tax free, the ISA wrapper is lost and the underlying cash or investments become taxable during the probate process. Any growth of the assets which were held in the ISA during this time is subject to tax.
From 6 April 2018, new rules will come in (for all types of ISA except the Junior ISA) meaning that when the investor passes away, their ISA becomes what’s known as a ‘continuing account of a deceased investor’ or a ‘continuing ISA’ for short.
No money can be paid into it from this point, but it will continue to benefit from the tax advantages of an ISA, so growth will remain tax-free. Its status as a continuing ISA lasts until either the administration of the estate is complete, the ISA is closed, or three years have passed since death – whichever is sooner.
The legislation also affects the ISA allowance that can be passed to the spouse (APS). 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.