ISA rule change boost for widows and widowers
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: firstname.lastname@example.org
The views expressed in this article should not be construed as financial advice