Until April 2015, on the death of an ISA account holder all the tax benefits of the account were lost forever. From April 2015 it has been possible for the equivalent of the ISA balance to be passed onto a surviving spouse or civil partner, and for the tax benefits to be reinstated.
Currently, from the date of death of the first spouse or civil partner who dies, their ISA accounts lose their tax-free status. This means that during the period of administration any income received into the account or gains realised will be subject to the Income tax and capital gains tax regimes and this may mean that the Personal Representatives need to file tax returns for the estate period of administration.
It won't be counted against the normal ISA subscription limit for the survivor but will instead be added on to their annual ISA limit. If the deceased partner had multiple ISAs with different providers, the surviving partner receives an APS allowance for each one.
The rules apply irrespective of the size of the deceased's ISA pots.
The APS is flexible, it permits subscription to cash or stocks and shares ISAs the surviving spouse holds, or, to new cash or stocks and shares ISAs opened for the purpose.
The value of the deceased’s ISA accounts forms part of their estate for inheritance tax and would be distributed according to the provisions of their will or the rules of intestacy. The APS is available to the surviving spouse regardless of whether they inherit the ISA account itself.
At present the APS allowance is equal to the value of the deceased’s ISAs at the date of death and does not change. So if the balance of the account increases or decreases after death the APS will be the value of the account at the date of death. This can cause some administrative difficulties when transferring the ISA assets if the stocks and shares held have grown in value.
Additional Permitted Subscription: The surviving spouse or civil partner does not inherit the actual ISA. Rather the tax-free status of the ISA account can effectively be regained as the surviving partner is given an Additional Permitted Subscription (APS) allowance. This is effectively a one-off ISA allowance that's equal to the value of the ISA at the date of the holder's death.
In specie’ transfers
This must be of the actual non-cash investments held, and therefore the surviving spouse would need to inherit these assets directly. The transfer then needs to be made within 180 days of beneficial ownership passing to the surviving spouse and to the same ISA manager.
The time limit is within three years of the date of death, or if later, 180 days of the completion of the administration of the estate. Under the current rules there are two potential issues:
- During the administration of the estate, the ISA has lost its tax-free protection.
- The assets may be growing and this means that the surviving spouse may not be able to rewrap all of those assets in an ISA once the administration of the estate is complete. From 6 April 2018, new rules are coming into force which mean that when an investor that holds an ISA account dies, their ISA becomes a ‘continuing account of a decease investor’ or a ‘continuing ISA’ for short.
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 will remain tax-free. Its status as a continuing ISA lasts until either the administration of the estate is complete, the ISA is closed, or three years have passed since death – whichever comes first.
This new legislation also affects the APS ISA allowance that can be passed to the spouse. At the moment, the allowance transferred to the surviving spouse is equal to the value of the ISA on the date of death.
From 6 April 2018, the APS will normally be the value of the cash or investments passed on, or the value of the ISA on the date of death – whichever is higher.