ISA rule change boost for wid­ows and wid­ow­ers

Birmingham Post - - BUSINESS -

ad­di­tional ISA al­lowance – equal to what­ever their spouse held in their ISAs at the time of their death.

“But im­por­tantly the val­u­a­tion of the ISA was con­ducted on the day of death, and this meant that any gains made by the in­vest­ments be­tween the date of death and the es­tate be­ing wound up were li­able to both in­come and cap­i­tal gains tax in ad­di­tion to IHT.”

Pro­bate – deal­ing with a de­ceased’s es­tate – can be long and tor­tu­ous.

Sarah Coles, per­sonal fi­nance an­a­lyst at Har­g­reaves Lans­down, said: “Un­for­tu­nately, the ad­min­is­tra­tion of a com­plex es­tate can take months, or even years. Dur­ing this time, the ISA in­vest­ments may con­tinue to grow.

If, for ex­am­ple, you have a £1 mil­lion ISA port­fo­lio, grow­ing at five per cent a year, you could end up with around £160,000 of growth over three years.” Pre­vi­ously this was taxed. It also meant that as­set growth be­tween the two dates could not then be placed back into an ISA. But all that has been swept away. Now, when an in­vestor dies, their ISA is re­clas­si­fied as a “con­tin­u­ing ac­count of de­ceased in­vestor” or “Con­tin­u­ing ISA” for short.

No money can be paid into it from this point, but it con­tin­ues to ben­e­fit from the tax ad­van­tages of an ISA, so growth in­side the wrap­per re­mains tax free.

This sta­tus lasts un­til ei­ther the ad­min­is­tra­tion of the es­tate is com­plete, the ISA is closed, or three years has passed since death — whichever is soon­est.

The sur­viv­ing part­ner can also put the en­tire amount into their own ISA.

The APS will nor­mally be the value of cash or in­vest­ments passed on, or the value of the ISA on the date of death – whichever is higher.

Thus, ISAs re­tain their tax ef­fi­ciency even after an in­vestor has died.

How­ever, ISAs are only in­her­i­tance tax free when they are trans­ferred to a spouse, as with all as­sets trans­ferred to a sur­viv­ing spouse. They are fully li­able to in­her­i­tance tax when pass­ing to any ben­e­fi­ciary other than a sur­viv­ing spouse, some­thing that is com­monly over­looked.

In ad­di­tion the rule changes, which also ap­ply to civil part­ners, have fur­ther sig­nif­i­cant IHT im­pli­ca­tions. In par­tic­u­lar for those hold­ing AIM-listed ISAs, typ­i­cally used by in­vestors to min­imise IHT.

The Govern­ment changed the rules in 2013 to al­low AIM-listed shares to be held in an ISA and to qual­ify for Busi­ness Prop­erty Re­lief (BPR).

In such cir­cum­stances the in­vest­ment can be free of IHT pro­vided the shares have been owned for at least two years at the time of death.

And the new rules ap­ply to th­ese AIM-listed ISAs too.

But be­ware on three fronts – this is a tax break at the whim of govern­ment and can be taken away at the whim of govern­ment, not all AIM shares qual­ify, and many AIM share are more volatile and risky be­cause they are young com­pa­nies with lit­tle track record. Still, well worth ex­plor­ing. Trevor Law is man­ag­ing di­rec­tor of East­cote Wealth Man­age­ment, char­tered fi­nan­cial plan­ners,

based in Soli­hull. Email: tlaw@east­cotewealth.co.uk

The views ex­pressed in this ar­ti­cle should not be con­strued as fi­nan­cial ad­vice

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