A Quick Explanation Of New ISA Inheritance Rules

April 6 was the start of a new tax year which led to a host of new changes in the financial landscape. A significant change is the new rule relating to ISA inheritance as you are now entitled to an additional ISA allowance if your spouse of civil partner dies.

If an ISA saver dies and was either in a civil partnership or married, the surviving partner is entitled to an extra ISA allowance equal to the balance of their partner’s ISA on the day they died. The new rule was announced last Autumn and could affect up to 150,000 people.

Additional Permitted Subscription (APS)

The new allowance is called the APS allowance and does not depend on the surviving spouse inheriting the investments or cash contained within the ISA. If you are affected by the change, there are trade bodies and savings providers available to give you advice. With the APS allowance, it is possible for the deceased spouse to pass their ISA along with the accompanying tax advantages on to their surviving partner who can use it on top of the current £15,240 ISA allowance.

You are eligible if your spouse/civil partner died after 3 December 2014 and the new APS allowance can be used from 6 April 2015 onwards. You will need to fill in an application form to benefit and the APS allowance can be used with the ISA provider of the deceased or else it can be transferred to another ISA provider. However, it can only transferred once and can only be used when no subscriptions have been made under the allowance. If the deceased had more than one ISA provider the allowances can be held with the same number of ISA providers.

Please not that not every ISA provider will accept the new APS allowance subscriptions but they must pass it on to a provider that will oblige. Depending on the provider, it may be possible for the spouse to make regular payments when using the allowance although others may only permit a one-time lump sum payment. ISA providers are also entitled to require the APS to be used by topping up an existing ISA or via a separate ISA.

Time Limit

In most cases, you will need to use the APS allowance within 3 years of your spouse/civil partner’s death and allowance subscriptions can be made to an investment ISA or a cash ISA. The APS allowance is not limited to UK residents; if you have moved abroad but your spouse/civil partner had an ISA in the UK when they died, you can claim the allowance.
It cannot be transferred to another person which means only the surviving spouse is allowed to use it. Additionally, it does not apply to Child Trust Funds or Junior ISAs.

According to the operations director at Tisa, Carol Knight, around 150,000 married ISA holders die annually so the changes will benefit the spouses/civil partners of those who have died on or after 3 December 2014 by enabling them to save more due to the tax advantages associated with the ISA wrapper. She said it was a ‘fair’ solution and one which her company has advocated for a long time. She concluded by pointing out that in the past, a civil partner or spouse would have savings in their partner’s name only to lose out because they lost the tax-free status of their savings before they inherited it.