After someone dies, any ISAs they hold are effectively frozen and no money can be paid to beneficiaries during the administration of their estate. This is considered a ‘continuing ISA’, which during this period maintains its tax efficiency. This situation is maintained until one of these three conditions are met:
If the deceased leaves the assets held in an ISA to someone other than their spouse or civil partner, the partner maintains the right to assume some benefits. Perhaps surprisingly, they are still entitled to an increased allowance equivalent to the value of the ISA assets, even if they do not receive the money itself.
This is known as an Additional Permitted Subscription (APS) and can be used regardless of what the deceased stated in their will or if they died intestate. The APS allowance is the value of the money passed on at transfer, or the value at death, whichever is higher, and the surviving partner can choose where to transfer the inherited savings.
However, the status of the partnership at the time of death is a vital component. The spouse must have been living with the deceased for the APS allowance to apply. If the couple had separated or the partnership or marriage had broken down, the surviving partner cannot access the APS allowance.
Additionally, if the surviving partner is under 18 years of age, they cannot use a Junior ISA for the APS allowance. An adult product must be acquired.
An APS allowance can only be transferred once, but if there is more than one ISA to inherit, it can come from multiple providers. Importantly, you can only have one cash ISA and one stocks and shares ISA per tax year, but these rules are not breached if you open up an ISA for the purpose of an APS transfer.
It is important to know that the surviving spouse or partner must also act within a set time frame to apply to access the APS allowance.
For ‘in specie’ transfers, or keeping hold of the ISA in its existing state, there is a period of 180 days from when the beneficial ownership passes to the surviving spouse or civil partner for them to act.
For cash subscriptions, this timeframe extends to three years from the date of death. After three years, the application needs to be lodged within 180 days of the completion of the administration of the estate.
Once the transfer has been made, the normal ISA rules apply and the money is treated as if it were previous years’ subscriptions made by the surviving spouse.
Read our report on Planning for the Great Wealth Transfer
This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction. Trusts, estate planning, taxation and inheritance tax advice are not regulated by the Financial Conduct Authority. Tax treatment depends on an individual's circumstances and may change in the future.
The value of your investments and the income from them can fall and you may not recover what you invested.
