A costly ISA loophole which has prevented spouses from inheriting the full amount of their deceased partner’s individual savings accounts (ISA) tax-free is set to be closed by the government.
Since 2015, married couples and civil partners have been able to inherit their partner’s Isas upon their death. But a gap in the rules meant that none of the growth in assets built up between the partner’s death and the point that the estate was finalised – a process that can take years – could be inherited free of tax.
For someone with a £1m portfolio in a stocks and shares ISA growing at 5 per cent per year, that growth could be worth about £160,000 over three years, according to Hargreaves Lansdown. It would not be possible to put this sum back into an ISA wrapper after being inherited, meaning the spouse could incur a tax liability covering the whole three-year period.
From April 2018, following an amendment to the ISA rules this month, a deceased partner’s ISA will remain sheltered from tax and will be passed on in its entirety to a spouse or civil partner tax-free following the administration of the estate, potentially saving thousands of pounds that could otherwise have been lost.
Under current rules, partners can inherit Isas, but rather than receiving the cash or investments inside them, they receive an extra ISA allowance equivalent to that amount. This is known as an additional permitted subscription allowance.
From next year, when an investor dies the ISA will be reclassified as a “continuing account of deceased investor” or a “continuing ISA”. No money can be paid into it from this point, but it will continue to benefit from the tax advantages of an ISA, so growth inside the wrapper will remain tax free. This status lasts until either the administration of the estate is complete, the ISA is closed, or three years have passed since death – whichever is soonest. The surviving partner will also be able to put the entire amount back into their own ISA.
“Committed savers and investors have been able to build up sizeable ISA portfolios – sometimes up to £1m or more,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown. “The changes in April will cure these headaches, and iron out what has been a clunky and potentially expensive wrinkle in the rules.”
Source: Kate Beioley, The Financial Times