How a spouse can inherit the ISA tax advantages
The ISA, the Individual Savings Account, is a popular and well-known investment account. You can shelter cash and investments from tax – including income tax, dividend tax and capital gains tax – by ‘wrapping’ them inside an ISA. Given these tax advantages the Government places a limit on how much you can put into an ISA every year. This annual allowance is currently a rather generous £20,000. (Incidentally, everyone calls it the ISA allowance, but in the official parlance it is the Annual Subscription Limit – keep that in mind for later.)
The ‘Individual’ in the title is deliberate. It is yours and yours alone, you cannot have a joint ISA and you cannot give away any of your annual allowance (sorry, subscription) if you don’t use it all. And it also means that no-one can inherit the ISA tax advantages. On death the ISA account is closed and the cash or investments held within it are treated as if they are normal un-wrapped assets. These investments and cash can be inherited but they are no longer shielded from tax.
That was the case until April 2015 and that, technically, remains the case now, but from April 2015 the Additional Permitted Subscription (I told you to keep that word in mind) allows a spouse or civil partner to, in effect, inherit the tax wrapper. The ISA is still closed down and the investments are removed from the wrapper, but now a spouse or civil partner can elect to subscribe an amount up to the value of the ISA on death in a new ISA to sit alongside their own, if they have one. It is called the Additional Permitted Subscription because it is precisely that, an amount that can be subscribed in addition to the normal individual subscription.
As always, I like to explain technical details with an example, so let me introduce you to Fred and Wilma. They both have ISAs; Fred’s is worth £120,000 and is invested in several unit trusts, and Wilma has a Cash ISA with a balance of £80,000. In his Will Fred leaves everything to Wilma and on his death his ISA wrapper is closed and the unit trusts continue – but, of course, they are now outside the ISA wrapper and become liable to tax.
Wilma keeps her Cash ISA, to which she can make her individual £20,000 subscription, but she can also now apply for a new ISA to which she will be permitted to make a subscription of up to £120,000, the same value as the investments in Fred’s ISA when he died. Wilma has the choice of funding this by transferring in Fred’s unit trusts, or if she wishes, she could keep those and fund the APS with other cash, perhaps from the sale of Fred’s prized dinosaur fossil collection. The point is that it is the additional allowance that becomes available rather than the ISA being inherited, but the effect is the same. To clarify one point, the APS does not include the deceased’s standard Annual Subscription. So Wilma can still invest her £20,000 annually, but not Fred’s £20,000.
There are various rules and time limits to be met: it is only available to spouses and civil partners and you must have been living together at the date of death; there are 180 days to complete an asset transfer or 3 years if it is funded by cash; the APS must be invested with one ISA manager even if the subscription limit is made up of several former ISAs; and there are some other rules but I’ll only bore you if I type them all up here.
The APS joins a long list of other ISA formats; Cash ISA, Stocks & Shares ISA, Junior ISA, Help to Buy ISA, Innovative Finance ISA, and Lifetime ISA (though none that can hold fossil collections). Perhaps I’ll look at some of those in a later note.
Philip Chandler FPFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee