Planning with the Inheritable ISA Allowance

The inheritable ISA allowance for married couples and civil partners has been available since 2015. This tax break will become ever-more valuable from 6 April 2018.

Following the death of a spouse, the surviving husband, wife or civil partner is able to apply for an additional ISA allowance, the Additional Permitted Subscription, (APS). This is an amount up to the value of the deceased’s ISA savings and the allowance is in addition to the survivors own ISA allowance.

The inheritable ISA allowance in practice

For example, meet Pam.

Pam’s recently deceased husband Trevor held ISA savings totalling £100,000 on the day he died. Pam may therefore make a claim and have an additional £100,000 to invest into her own ISA, or a new ISA, as an Additional Permitted Subscription. If she hasn’t already used her 2017/18 ISA allowance, Pam may invest up to a further £20,000.    

Why is this more important in the new tax year?

An ISA is a ‘tax-free wrapper’, which allows investments to grow, free of Capital Gains Tax. The ISA wrapper also protects your investments from Dividend Tax (on investments) and Income Tax (on savings). The tax-free Dividend Allowance will reduce from £5,000 to £2,000 in the 2018/19 tax year. This means that where investments are held outside of a tax wrapper such as an ISA, you might pay tax, 7.5% for basic rate payers, 32.5% for higher rate payers and 38.1% for additional rate payers, on dividend income which exceeds the allowance of £2,000. Other tax wrappers such as pensions and onshore and offshore bonds can mitigate the dividend tax.

ISAs are very flexible, you can withdraw monies with no tax implication.

Using the example again, what if Pam does not use the APS to which she is entitled? If she places the £100,000 in a deposit account, the interest might be taxable. A basic rate tax payer may earn up to £1,000 of interest of savings per tax year, for a higher rate tax payer its £500 and an additional rate tax payer none at all before tax is due.

If Pam invested in shares or funds outside of an ISA wrapper, any dividend income exceeding £2,000 may be taxable. 

The calculation of the amount and rate of any tax payable will be determined by Pam’s overall breakdown of income from all sources. Many more investors will be paying dividend tax in 2018/19 than in this year, when the threshold reduces to £2,000.

Good use of the ISA allowance is especially important, along with associated tax breaks in protecting and growing wealth for the long term. Not all ISA providers accept Additional Permitted Subscriptions, but your Ascot Lloyd Adviser will be pleased to help you and make the necessary arrangements to suit your circumstances.