Do you know all the facts about Individual Savings Accounts (ISA’s)? Are you aware ISA’s can be passed on?

Although ISA’s are a tax efficient way to build up wealth, they may be far less efficient when passing them on. So, you do need to have an understanding of what happens to your ISA when you die.

Inheritable ISA rules were introduced in April 2015; individuals can now inherit the value of their deceased spouse or civil partner’s ISA’s, if they died on or after the 3rd December 2014.

The ISA isn’t actually transferred to the surviving spouse or civil partner but an Additional Permitted Subscription (APS) is created when the ISA investor dies.

What is an APS and how does it work?ISA

For example, if Mr and Mrs Smith both have £125,000 in their ISA’s and Mr Smith dies, his widow will inherit his APS of £125,000 in addition to her own ISA value. The allowance is available for three years from his death or 180 days after the estate administration is finalised. If Mrs Smith remarries Mr Bloggs and then Mrs Bloggs dies, the APS would continue to be passed on to Mr Bloggs, therefore he would inherit an APS of £250,000.

If Mr Smith had multiple ISA’s, Mrs Smith could combine all APS’s by transferring them to her provider of choice. However, once a provider has been selected, the APS can only be maximised with that provider.

Inheritance Tax (IHT) rules and how this would affect ISA’s which have been passed on

IHT considerations of inherited ISA’s are often overlooked or misunderstood.

No IHT is liable on ISA’s inherited between spouses or civil partner’s. This is purely due to the IHT spousal exemption. However, this does not apply to unmarried couples and may not apply upon the subsequent death of a surviving spouse or civil partner.

Continuing our example, if Mrs Smith dies, her ISA’s of £250,000 are included in her estate for IHT purposes. Assuming any Nil Rate Bands are already used, these potentially give rise to an IHT liability of £100,000.

Potential planning opportunities

It is possible to hold a portfolio of Alternative Investment Market (AIM) shares in an ISA wrapper. AIM ISA’s have the potential of attracting Business Property Relief (BPR) as long as eligible shares have been held for at least two years prior to death. However, AIM ISA’s are not for the faint-hearted; it is important for would-be investors to have a detailed understanding of the advantages and the disadvantages (and be willing to accept the inherent volatility and risk) before committing.

BPR potentially extinguishes IHT on the eligible AIM shares, which may be of benefit to those ISA investors seeking to mitigate any IHT liabilities.

Another alternative to consider would be the use a Whole-Of-Life protection plan, and using the situation above, written on a joint life second death basis and held within a suitable Trust arrangement.

With premiums perhaps paid from ISA income or withdrawals and falling within the annual IHT gift and / or normal expenditure from income exemptions, the sum assured would be paid out to the Trust upon second death, which would allow the beneficiaries the ability to cover the IHT liability.

Subject to health and the ability to continue to pay the premiums, this may be a quick and simple solution that retains the tax efficiency afforded by ISA’s.

Estate administration

Before the 6th April 2018 there was a gap in the rules which meant that between the date of death and formal closure of the estate (if the latter was greater), ISA’s could be subject to tax at the highest rates applicable to the personal representatives.

After the 6th April 2018, ISA’s retained their tax-advantaged status during an estate’s administration period, saving the personal representatives having to potentially cash in ISA’s and account for tax. The good news for personal representatives and surviving spouses or civil partners is that it means the APS is now based on the ISA value on date of closure not date of death.

What should you think about?

Although your ISA’s are tax efficient saving accounts, if the ISA is passed on after first death it can create an IHT issue for the remaining partner if their Nil Rate Bands have been used. We would, therefore, recommend that you seek professional advice from your financial planner to ensure any APS is carefully organised.

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