ISA changes for surviving spouses and civil partners

ISA changes for surviving spouses and civil partners

HMRC is consulting until 20 February 2015 on draft regulations to provide an additional ISA allowance for the spouse or civil partner of an ISA saver who dies on or after 3 December 2014.

The allowance will be equal to the value of the deceased person’s ISA savings at the time of their death. This measure is expected to come into effect from 6 April 2015.

Remember the Autumn Statement?

The ISA changes announced in the Autumn Statement were very clumsily worded. For example… “The government is allowing the tax advantages of married ISA savers to be inherited by a surviving spouse or civil partner on the death of the ISA holder.”

Now we know how it is intended that the changes will work in practice!

Where the first death is on or after 3 December 2014, then, from 6 April 2015 the surviving spouse or civil partner can make an “additional permitted subscription” on top of the annual subscription limit to his/her ISA.

Basically, what will happen is that the survivor will be able to make an ‘additional’ subscription to a cash or stocks and shares ISA which the survivor holds with the deceased’s ISA manager. If that doesn’t apply, then the survivor can open a new ISA with that manager for that purpose (in practice an ISA manager will be able to insist on a new ISA being opened if it helps police the additional subscription). An ISA opened solely to receive the additional subscription will not cause the survivor to breach the one ISA of each type per tax year rule.

What doesn’t change is the fact that once the ISA manager is notified of death, the deceased’s ISA wrapper must be removed.

The ‘additional’ subscription

  • Must be made with the deceased’s ISA manager
  • Is limited to the value of the deceased’s ISA at death
  • Must be made within specified time limits
  • Can be made in cash or certain inherited non cash ISA assets
  • Is available whether or not the surviving spouse inherited the ISA
  • Can be made by a non UK resident

Other Points

  • Spouses must have been ‘living together’ at date of death. That is, not separated under a court order, under a deed of separation, or in circumstances where the separation was likely to be permanent.
  • If the deceased held a number of ISAs with the same ISA manager the subscription limit will be the combined value at death.
  • If the deceased held ISAs with a number of different managers, the survivor will have additional subscription limits with each manager.
  • The survivor can make a single additional subscription or a series of subscriptions up to the limit (subject to the manager’s t&cs).
  • Once the additional subscription is made then the survivor can transfer under normal ISA rules (the additional subscription is treated as a previous year subscription).
  • Cash subscriptions must be made within 3 years of death, or if later, 180 days from completion of the administration of the estate. Where first death occurs in the period 3 December 2014 to 5 April 2015, the 3 year period starts on 6 April 2015, but the additional permitted subscription limit is still the value at death.
  • In specie transfers (non cash) must be made within 180 days of beneficial ownership passing to the survivor. Where the estate makes an interim in specie distribution(s) followed by a final distribution, each will have a 180 day window. Similar to above, for distributions prior to 6 April 2015 in respect of deaths between 3 December 2014 and 5 April 2015, the 180 days will run from 6 April 2015.

Where the additional permitted subscription is made in cash, that may be done using cash inherited from the deceased or any other cash the survivor has available. Where the additional permitted subscription is made by an specie transfer, then only inherited non cash ISA assets can be used and provided the title to those assets has remained with the ISA manager or his nominee. If the value of the assets increase during the administration period then it will not be possible to subscribe them all to the ISA. Conversely, if the value decreases then all the assets can be subscribed ‘in specie’ with a cash top up to the subscription limit.

It is possible to hold an insurance policy in a stocks and shares ISA. That policy will be on the life of the ISA investor alone and will pay out on death and cannot therefore fall under the in specie transfer rules. Joint life, multiple life & life of another policies are not permissible as qualifying investments for an ISA. In specie contributions are of course rare in the ‘normal’ ISA world where subscriptions must be made in cash subject to specified exemptions.

 

Source:  Graeme Robb – Prudential