Individual Savings Accounts (ISA) are a 'wrapper' to fully protect savings from tax, allowing individuals to invest money up to maximum limits (by way of regular or single amounts) each tax year tax efficiently. Any capital within an ISA grows free of income tax, capital gains and dividend tax and the current ISA limit is £20,000. But what happens to these savings when you die?
In part 2 of our 'Investments Beyond Life' series, we explore what happens to ISAs in the event of the account holder's death, both when there is a surviving spouse and when there isn't.
What happens to ISAs if there's a surviving spouse?
In the event of death, if there is a surviving spouse, then an additional ISA allowance is available for spouses or civil partners which is called "Additional Permitted Subscription" (APS). The additional ISA allowance is equal to the value of a deceased person's accounts at the time of their death (or at the end of the administration period if higher) and is in addition to the normal ISA subscription limit. This allows for ISA tax benefits to continue after death.
For example, if Mr Smith had £500,000 in his Stocks & Shares ISA then, Mrs Smith would have £500,000 of APS and will be able to make an additional ISA contribution of £500,000 in that tax year in addition to her standard annual allowance.
There are time limits within which the additional allowance has to be used. In certain circumstances, an individual can transfer to their own ISA non-cash assets such as stocks and shares previously held by their spouse.
In most cases, it is envisaged that the additional allowance will be used to subscribe to an ISA offered by the same financial institution that provided the deceased person's ISA. As the rules allow the transfer of stocks and shares directly into the new ISA, in many cases the effect will be that the investments are left intact and the spouse becomes the new owner of the deceased person's ISA. The tax advantaged treatment of ISAs continues whilst an individual's estate is in administration.
What happens to ISAs if there is no surviving spouse?
If there is no surviving spouse, then the ISA loses its ISA status and therefore the tax advantages and will be distributed according to the Will or intestacy rules.
Any capital within an ISA will be within the deceased's estate and therefore subject to Inheritance Tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.