In loving memory of their ISA

Out of sight and out of mind

In the December 2014 Autumn Statement, Chancellor of the Exchequer George Osborne pulled a rabbit out of his dispatch box by explaining to the unsuspecting that if someone passes away they can’t pass on their potentially valuable Individual Savings Account (ISA) wrapper to their spouse, even if they have saved the money together. The remaining spouse could have benefited from the assets held in the ISA, but the tax-preferred ISA wrapper died with their spouse. Typically, HM Treasury estimated 150,000 people a year lost out on the tax advantages of their partner’s ISA when their partner passes away.

From 3 December 2014, if an ISA holder dies, they have been able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance which has been in force since 6 April 2015. Importantly, the surviving spouse or civil partner is allowed to invest as much into their own ISA as their spouse used to have, in addition to their normal annual ISA limit (£20,000 at the time of writing).

Whilst hitting the headlines at the time, the later confirmed fine detail didn’t get the column inches in the press and it is worth recapping the criteria:

  • A surviving spouse/civil partner may make an additional ISA subscription equal to the value of the deceased spouse’s/partner’s ISA at the date of their death;
  • A surviving spouse/civil partner may have non-cash holdings (e.g. unit trusts, OEICs and shares) in the deceased spouse’s/partner’s ISA to form part or all of the subscription
  • A surviving spouse/civil partner has a set a time limit for the bereavement subscriptions, which are broadly 180 days after administration of the estate is complete or, in the case of cash assets, three years from the date of death, if later.

The opportunity to transfer existing ISA investments is particularly useful for both executors of estates and the surviving spouse/civil partner. Initially, the Autumn Statement had appeared to suggest that investments would have to be realised and subscriptions could only be in cash. However, this is far too simple. The situation is complicated by the requirement for the deceased’s ISA assets to be taxable as part of the estate from the date of death until the making of the surviving spouse/civil partner’s bereavement subscription.  To complicate matters further, because the surviving spouse/civil partner’s bereavement subscription value is fixed at the date of death, a transfer of non-cash holdings will be affected by changes in value before the subscription is made.

At the time, the Treasury’s red book suggested that the cost of this reform would be negligible in revenue terms; forecasting £10m in 2019/20. But, if people read this blog and are aware there is the potential to cost the Treasury a lot more, particularly if whilst both living full advantage has been taken of the seemingly ever-increasing ISA subscription limits.

Whilst the rules for this rabbit-out-of-the-hat refer exclusively to the preferred tax treatment of the ISA wrapper (no additional income or capital gains tax) there is clearly a potential knock-on to the subject of Inheritance Tax. Post-December 2014 it makes sense for wills to specifically leave ISA assets to surviving spouses in order to benefit from the spousal transfer exemption, thus potentially reducing the value of the overall chargeable estate.

 


Paul Corner is a Chartered Financial Planner, award-winning university lecturer, adviser to the DWP’s Pensions Advisory Service and financial planning member of the ‘Resolution’ the Solicitor’s Family Law Association.Tax treatment and laws related to personal finances change on a regular basis. Any investments or financial products referred to are not endorsed, nor recommended. Discussion points raised in blog articles should not be acted upon without professional advice. E & O.E.

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