Inheriting ISAs and the rules around ISA inheritance
- Author : Novia Financial
- Date : 12 Dec 2019
Now that Novia offers in-specie Additional Permitted Subscriptions it’s the perfect time to review the changes to the rules around ISA inheritance.
The Lifetime Allowance (LTA), currently set at £1,055,000, is the maximum amount of pension benefits that a person can crystallise during their lifetime before the tax incentives of a pension scheme become significantly degraded. This article takes you through some of the calculations that are used by pension scheme administrators to test against LTA, and may provide some food for thought if you’re considering the options for managing large pension pots into retirement.
Prior to 2015, ISAs belonging to deceased investors had to go through a confusing and detailed process in order to be distributed as part of the estate. The tax benefits afforded by ISAs were only available to investors during their lifetime, so at the date of death the ISA would be dismantled. Providers had to ‘unwrap’ the investments so that they were exposed to tax. In most cases the contents were then inherited by a surviving partner, who would become liable for capital gains tax and income tax since the date of death.
Time delays were an issue. Sometimes death notification would not reach the ISA manager for a month or two, during which time tax free interest and distributions will have been applied to the account. Rather than unpick those transactions, ISA managers were supposed to give the beneficiary a detailed transaction history so that they could go through it with a fine-toothed comb to identify and pay any tax due. Clearly this was an unrealistic expectation and something that would require professional help.
In April 2015 Additional Permitted Subscriptions (APS) were introduced. This enabled a surviving spouse or civil partner who was inheriting the ISA to transfer the contents to their own ISA. In theory it solved the problem of unexpected and unwelcome tax liabilities, but in practice it only went half-way to achieving this. For a start, the APS limit was set at the ISA value at the date of death. That meant that any growth during the administration of the estate, which in the UK means typically 6-9 months, would not be eligible for APS and would instead end up as a taxable amount in the hands of the spouse. Also, in spite of the changes, the rule about an ISA only being valid during an investor’s lifetime was still in place, so the ISA still needed to be unwrapped and exposed to tax for the 6-9 months. So progress was made, yet the fine-toothed comb would still get an airing.
It wasn’t until April 2018 that the full package was delivered. An ISA can remain ‘wrapped’ during the administration of an estate. What’s more, the value of the APS can be extended if there is growth during that time. Whilst the in-specie option for inheriting assets was technically possible from 2015, the 2018 change made it widely feasible. Following some internal development, Novia is now pleased to offer in-specie APS so that the investments don’t need to come out of the market.
The following illustrations assume a continuously growing fund value (both inside and outside the ISA), and an immediate subscription via APS:
Some APS facts:
APS is an allowance in addition to the usual £20k. It’s recorded by the ISA manager as previous years’ subscriptions.
- APS is only available to a spouse or civil partner who was living with the deceased at the time of death.
- APS is separate to the inheritance. If an ISA investor specifies in their will that the contents of their ISA should to be left to their children, the surviving spouse can still qualify for the APS and make up the additional subscriptions with their own money – for example, from savings or from other sources of inheritance.
- A qualifying spouse or civil partner has 3 years to utilise APS. That means that, if they are paying with their own money, they can potentially pay in instalments.
- Cash subscriptions can be made across the open market. ISA managers have a framework for communicating with each other to allow for APS to be utilised anywhere.
- In-specie APS is possible but only with the ISA manager who held the deceased’s ISA.
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