Inheriting your loved ones ISA and how it works
We've had lots of questions on the new rules surrounding the Inherited ISA allowance. We've answered one of our readers' questions below to explain how it works.
If you want general advice around inheritance tax why not download our guide on how to cut your inheritance tax bill. Or if you have any further questions on the Inherited ISA allowance you can speak to one of our savings advisers on 0800 321 3581.
Q - When my husband died recently, he held cash ISAs with a number of building societies. I understand that I am entitled to inherit these ISAs. Can you explain how I do this?
A - On 3rd December 2014, the Chancellor of the Exchequer, George Osborne, announced the introduction of a new ISA rule which took effect on 6 April 2015. This allows spouses or civil partners* of ISA holders who have died since 3 December 2014, to inherit an additional one-off ISA allowance, equivalent to the value of their deceased partners ISAs on the date of their death.
This allowance is known as an Additional Permitted Subscription (APS) and there is a separate APS with each of his ISA providers.
So, as you rightly point out, on your husband’s death, you effectively inherited his ISAs. However, rather than the actual cash held within the ISAs, what you have in fact inherited is an additional ISA allowance. For example, if he held an ISA with Nationwide and it was worth £20,000 on the date of his death, you are able to invest an extra £20,000 in addition to your own ISA allowance for the current tax year. If he also held another ISA with another provider, again worth £20,000, this is yet a further £20,000 allowance for you to use.
An important point is that on your husband’s death, whilst you inherited an APS with each of his providers, the actual ISAs he held became taxable accounts and the funds will remain taxable until the estate is settled. But, if you have cash of your own, you could shelter this immediately by using his APS – so you don’t need to wait until the estate administration is complete. Once again, it is the additional allowance equivalent to the value on his death that you inherit, not the actual cash held in the ISA itself.
In order to make use of the allowances, you have two options; (1) to do so with the original providers or (2) to transfer the APSs to a new provider.
However, because this is a newly introduced rule, many of the savings providers do not offer the facility to transfer an APS Allowance at the moment.
If you want to use another provider instead of the ones your husband had, you can open an ISA account with the original provider, and make an APS payment either from the proceeds of the estate once probate has been settled or from your own cash reserves if you have this available.
But if you want to transfer it, once this money is in the account it is effectively treated the same as monies paid into an ISA in previous years. This means that you can transfer it to one or more providers that accept ISA transfers.
Strangely enough, if you close the account before you have paid in the full APS Allowance then any unused allowance will be lost, so you need to take this into account when you plan how to use the APS. The allowance is available for three years from the date of death or up to 180 days after administration of the estate is complete, whichever is later.
It is also worth remembering that the FSCS limit will reduce to £75,000 from 1 January 2016, although the new rules do allow some added protection for temporary high balances up to £1m in cases such as inheritance, for six months after the account is first credited.
If you want some help in deciding what to do with an Inherited ISA, please contact one of our Independent Savings Advisers on 0800 321 3581.
Also, if you want any help with Inheritance Tax Planning, please download our free guide.
* In order to be eligible, the spouse or civil partner must not have been legally separated at the date of death.