The Chancellor's welcome announcement that ISAs can now effectively be passed on death to a surviving spouse or civil partner has made the tax-wrapper even more valuable.
This is subject to change following final legislation, but HM Treasury has outlined the new system as follows. The surviving spouse will be given an additional, one-off ISA allowance, equal to the value of the deceased's ISA holdings. This enables them to re-shelter assets which were in a spouse's ISA into an ISA in their name.
How it may work - an example
An investor holds £50,000 of ISA savings and investments and died on 5 December 2014. From the date of death to the distribution of the value at probate, the ISA tax wrapper is lost and the £50,000 becomes subject to income tax on any interest or dividend income generated or capital gains tax where gains are made.
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
Following probate, the value passes to the surviving spouse.
On 6 April 2015, at the start of the new tax year, the spouse has a one off opportunity to shelter £50,000 into an ISA in their name in addition to their own £15,240 ISA allowance, giving a combined allowance of £65,240. This could be subscribed to a new ISA or an existing ISA.
Will this save inheritance tax?
No, this change does not save inheritance tax.
The value of ISAs are subject to inheritance tax on death with one main exception - where ISA investments qualify for business property relief such as qualifying AIM shares held for a two year period. However transfers of any assets between spouses on death are IHT free.
What might investors do now?
This change is just one of a raft of new rules introduced this year which make ISAs more appealing to investors although tax rules can change and benefits depend on individual circumstances.
Once the final rules have been confirmed, it might be wise for couples to check their wills to ensure ISAs are left to each other in order to benefit from this tax break.
ISAs - a reminder of the benefits
An ISA, or Individual Savings Account, is not an investment in its own right. The best way to think of an ISA is as a 'wrapper' in which you can shelter savings and investments from tax.
Within an ISA you pay no capital gains tax and no further tax on income or interest. You don't even need to declare ISAs on your tax return, and less tax means higher returns for you.
Any UK resident aged 18 or over (16 for Cash ISAs) can invest. There is no upper age limit and you can withdraw your savings whenever you need to.
|Current rates of tax||Basic rate tax payer||Higher rate tax payer||Additional rate tax payer||ISA investor|
|Interest income (i.e. from cash, corporate bonds and other fixed interest investments)||20%||20%||20%||0%|
|Dividend income (i.e. income from shares)||10%||32.5%||37.5%||10%*|
|Capital gains (in excess of the £11,000 allowance)||18%||28%||28%||0%|
Remember tax rules can change over time and the value of any tax benefits will depend on your circumstances.
*All UK dividends are paid with a notional 10% tax credit deducted, which cannot be reclaimed within an ISA. CGT is more complicated if you are a basic rate tax payer and the gain, when added to your taxable income, takes you into the higher rate tax bracket.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.