Death and ISAs
When pension freedoms were announced, there was surprise not just at the removal of all limits for taking benefits, but especially at how generous the death benefit rules became. On ‘freedom day’ (6 April 2015), there were also changes to the treatment of ISAs on death, for the benefit of spouses/civil partners. These changes are understandably talked about a lot less, but are underused and can be of considerable benefit.
George Osborne first announced the introduction of the ‘Additional Permitted Subscription’ (APS) in the Autumn Statement on 3 December 2014. In its original form, the APS was available from 6 April 2015 for the spouse or civil partner of an ISA saver who had died on or after the date of the announcement. The basic concept still applies, but tweaks to the rules have been made that affect deaths on or after 6 April 2018.
Additional Permitted Subscriptions – the basics
The APS is an additional ISA allowance available to the spouse/civil partner of a deceased ISA investor. It is not an inherited ISA – despite how some providers might brand it!
The allowance lets the survivor make an extra ISA subscription that doesn’t count towards their own allowances.
It’s important to note that the deceased could leave their ISA assets to someone else – most commonly children – and this would have no impact on the availability of the APS to the spouse/civil partner. It may, of course, have a very significant impact on the survivor’s ability to make full use of the APS.
The rules state that the deceased and the surviving spouse or civil partner must have been living together at the date of death and cannot have been separated under a court order, deed of separation or in circumstances where the marriage or civil partnership has broken down. The survivor must provide a declaration to the ISA manager confirming this before they can make the APS.
ISA investors who died on or before 5 April 2018
Under the first version of the rules, the amount of the APS was the value of the deceased’s ISA at their date of death. For those who died on or before 5 April 2018, the ISA wrapper had to be removed from date of death – or the funds transferred to another account. This meant any interest, dividends or gains that were paid after date of death were taxable in the hands of the estate.
If income tax had been deducted from a payment, as long as the date shown on the tax voucher was prior to the date of death, it was still possible for the estate to reclaim the tax that had been deducted.
Although these rules have changed for people who die now, it is still possible you may come across estates that are being dealt with where the death occurred before the rule change.
Whilst it is not a requirement that the surviving spouse/civil partner is the beneficiary of the ISA assets, it is commonly the case that they are. In practice, this meant that under the original rules, once the estate was dealt with and the time came to move the assets from the deceased’s account to the survivor’s ISA, the APS alone was not sufficient to allow the whole (former) ISA holdings to be moved across due to growth of assets between date of death and date of transfer. This frequently meant that the survivor would have to use some of their own ISA allowance too or, if they had insufficient spare allowance, then a number of assets would have to remain outside the ISA wrapper.
ISA investors who died on or after 6 April 2018
From 6 April 2018, the rules changed, primarily to allow surviving spouses/civil partners who were the beneficiaries of the deceased’s ISA to have the whole fund (including growth) transferred to them under the APS rules. For investors who died on or after 6 April 2018, the account can continue without the tax wrapper having to be removed. This is known as a ‘continuing account of a deceased investor’. This account can continue to receive interest, dividends and gains in respect of the investments held and this will remain tax-free. This can continue until the earlier of:
No further subscriptions can be made, but the personal representatives of the deceased investor can continue to actively manage investments held in the account.
When it comes to the APS, the survivor has the choice of using the value of the ISA at the date of death or at the date the account is closed. It is also possible that where the deceased had accounts with more than one ISA manager, that they could choose the date of death with one manager and date the account is closed with another – but where any one ISA manager has multiple accounts for the deceased, they should not work out the APS by using a mix of account values at date of death and when the account is closed.
It’s also worth noting that you do not have to wait until the estate is settled to use the APS: the two things are not directly related and, as mentioned earlier, the APS is not related to who actually benefits from the ISA assets (although often it will be the spouse who is the beneficiary). This means that a spouse who has other cash available could immediately use the APS following the death of the ISA investor, even if the estate isn’t settled and the ISA account of the deceased is not then closed for several months. In this instance, it would be the value of the ISA at date of death that would be used for the maximum APS.
Making Additional Permitted Subscriptions
Under HMRC rules, the APS can be made to any ISA manager of the survivor’s choosing, but it is up to the ISA manager whether they accept them. You may find that you need to – or it is easier to – make the APS to the manager who held the deceased’s account, then transfer the ISA elsewhere if they are not the preferred manager.
Any subscriptions made under the APS rules are treated as previous year’s subscriptions, so it does not matter if the survivor has already paid into their existing stocks and shares ISA with one manager; they can still pay the APS into another stocks and shares ISA with a different manager (i.e. the one who held the deceased’s account) without breaking the ‘paying into more than one ISA of the same type in one year’ rule. Similarly, there is no issue with opening a new ISA to receive the APS even if they have already opened a new ISA of the same type with a different manager in the same tax year.
The survivor can choose to use the APS to pay into a cash, stocks and shares, innovative finance or Lifetime ISA, or a combination of ISAs, and these can be existing ISAs or new ones set up to receive the APS. The only restrictions apply to Lifetime ISAs, for which the survivor must be eligible. This means they must be aged 18–39 if they are opening a new account, or under 50 if they already have a Lifetime ISA they want to pay the APS into. The APS still counts towards the £4,000 Lifetime ISA limit and they can only pay in if they haven’t paid into another Lifetime ISA in the tax year.
Each APS limit must be used with one manager. For example, if there was an available APS of £50,000 relating to an ISA the deceased held with manager A, you couldn’t use £30,000 with manager A for a stocks and shares ISA and £20,000 with manager B for a cash ISA. You could, however, split the £50,000 between a stocks and shares ISA and a cash ISA both with manager A.
However, if the deceased held ISAs with different managers, then the survivor will have a separate APS limit from each one. So they could use the APS from manager A for a stocks and shares ISA with manager A, and the APS from manager B for a cash ISA with manager B.
In the rare event of the survivor entitled to the APS being a 16 or 17 year old, then they would only have the option of paying it into an adult cash ISA, as it is not possible to make APS payments to Junior ISAs.
It’s also worth noting that in the event of the death of a child holding a Junior ISA, there is no option to have a continuing account of a deceased investor whilst the estate is settled. From the date of death, the Junior ISA wrapper is removed and the estate must deal with any taxes arising.
The APS can be made at any date from the date of death up to the time limits given below, depending on the form of the subscription.
Where the survivor is the beneficiary of the ISA assets and they want to transfer these in specie, the transfer from the deceased’s ISA must be completed within 180 days of the beneficial ownership passing to them.
For cash subscriptions, the APS must be used within three years from the date of death or, if later than three years, within 180 days of the completion of the administration of the estate.
The ISA death rules may seem more complicated than they need to be but, for couples with substantial ISA holdings, the APS can still be a very valuable benefit.
This article was previously published by FT Adviser