Ask an expert: “My husband recently died. What happens to his ISA?”
The tax benefits of an ISA can be passed to your spouse as well as the assets held within it. This means the vehicles can be a useful source of tax-free income in later life for the surviving partner, as our case study illustrates.
Joanne is 75. Very sadly, her husband Paul recently passed away. Joanne and Paul were both diligent savers during their working lives and managed to build up stocks and shares ISAs with the same provider, worth £350,000 each. Joanne often discussed specific ISA investments with Paul. However, she is unsure about how Paul’s ISA will be treated moving forwards.
Continuing ISA status
On Paul’s death, his ISA immediately became a “continuing ISA”, which will remain open until the administration of his estate is complete (as long as this is within three years). While the account is a continuing ISA, the investments within the ISA wrapper continue to grow free from income tax and capital gains tax, although no new subscriptions are allowed.
ISAs and inheritance tax
As Paul’s spouse, Joanne has the benefit of being able to inherit the ISA free of inheritance tax under the spousal exemption. It is possible to leave an ISA to anyone you wish within your will. However, it is worth noting that if the ISA is left to someone who is not your spouse or civil partner, then it will be subject to inheritance tax and will lose the tax-free ISA status going forward.
What happens after Paul’s estate is settled?
As Paul’s spouse, Joanne is able to claim an additional one-off ISA allowance, which is known as an Additional Permitted Subscription (“APS”). This mechanism allows Joanne to continue to benefit from tax-free income and gains on an amount equal to the value of Paul’s ISA. It effectively means that as well as inheriting the assets within the ISA, she also inherits the associated tax benefits. This is in addition to her own personal ISA allowance for the tax year.
The value of the APS is the higher of; the value of the ISA on the date of Paul’s death, or the value of the ISA when it is closed.
Paul’s stocks and shares ISA was worth £350,000 at the date of his death and, when his executors come to distribute his estate to Joanne, the ISA has grown in value to £365,000. In this case, Joanne is therefore entitled to apply for an APS of up to £365,000.
Joanne would still be able to apply for the APS and make the equivalent contribution from her own assets, even if Paul had left his ISA to someone else in his will.
For those who died between 3rd December 2014 and 5th April 2018, the rules were slightly different.
How is the ISA accessed?
There are two ways for Joanne to use the APS:
• Cash transfer: She can instruct the sale of Paul’s former ISA investments, with the cash proceeds transferred to a new ISA.
• “In-specie” transfer: Paul’s former ISA investments can be transferred directly to her ISA without being sold.
If Joanne chooses the in-specie transfer, this needs to be made within 180 days of Joanne receiving the assets from Paul’s estate. In addition, this type of transfer can only be made to the ISA provider of the deceased. However, as Joanne’s ISA is held with the same provider, this will not be an issue on this case.
Future planning opportunities
Joanne will end up with an ISA in her own name valued at ca. £700,000. She can draw income from the ISA completely tax-free for the remainder of her lifetime. Depending on her income requirements and the rest of her asset base, there may be scope for further estate planning to reduce her inheritance tax liability.
This communication is for information purposes only and is based on the author's understanding of the law in force at the time of publishing. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Readers should seek professional advice for their individual circumstances.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.