Some key points about the current regime for ISAs
- “Individual savings accounts” – generally referred to as “ISAs” – were introduced by Gordon Brown in 1999. The general idea was encouraging savings by providing that, subject to modest limits, funds invested in ISAs could grow free of income tax (“IT”) and capital gains tax (“CGT”). Such funds are often referred to as being in a “tax wrapper”.
- The current annual allowance for ISA investment is £15,000 rising to £15,240 on 6th April 2015.
- ISAs are free of IT and CGT while the investor is alive but the tax wrapper flies off on death. So the investment is then liable to IT and CGT.
- As for Inheritance Tax (“IHT”), ISAs are not generally free of IHT on death. So, for example, if a person dies with a taxable estate leaving everything to their children then the ISA funds will in principle be liable to IHT on death in the same way as the rest of their estate.
- That example referred purposefully to children because children are “chargeable” beneficiaries for IHT purposes in relation to a person’s estate on death. If, instead, the deceased left their estate to their surviving spouse there would be no IHT. But that is because a spouse is an “exempt” beneficiary for IHT purposes: it is a function of the IHT rules rather than a function of the ISA rules.
- So, if a surviving spouse inherits their spouse’s ISAs on death there will be no IHT in relation to that gift but the ISA funds will no longer be in an IT and CGT tax free wrapper. And, on the subsequent death of the surviving spouse, the inherited ISA funds will, in principle, be liable to IHT on his or her death.
- That is the current position. But the Chancellor has proposed that, for the future, surviving spouses may, in effect, acquire the tax wrapper status for the ISAs held by their spouse at death. The consultation period in relation to these new rules ends this month.
- References in this Note to “marriage” (however expressed) mean the parties to a same sex or opposite sex marriage and include civil partners.
George Osborne in generous mood – the key proposal in essence
- George Osborne has now proposed that the ISA rules be changed so that, on death, ISA tax wrapper benefits may be passed on to a surviving spouse.
- For deaths on or after 3rd December 2014 a surviving spouse will have an additional one-off ISA allowance equal to the value of the deceased’s ISA(s) at death.
- The ISA wrapper for the deceased’s ISAs is still lost on death. The way in which the tax wrapper benefit may nevertheless be preserved is by giving the surviving spouse the scope to invest an additional one-off ISA allowance equivalent in amount to the value of the deceased’s ISAs at death.
- ISAs come in two broad types: “cash ISAs” or “stocks and shares ISAs”. Little more is said about the distinction here other than to mention that the detailed functioning of the proposed new rules outlined below may differ a little depending on which type of ISA is relevant in any particular case.
- The proposal as a whole will involve changes to the ISA rules (contained in the Individual Savings Account Regulations 1998/1870). The amendments to the rules have still to be finalised but it is expected that they will provide as outlined in this Note and will have effect from 6th April this year.
Certain points of detail about proposed rules
- In principle, the surviving spouse may invest in an ISA up to the value – as at date of death – of the ISA accounts held by the deceased.
- In outline, the circumstances in which the additional ISA allowance is available are where:
- The ISA investor dies on or after 3rd December 2014 leaving a spouse.
- Both parties were “living together” at the date of the deceased’s death.
- The surviving spouse opens an ISA account in his or her own name (which must generally be managed by the same “account manager” who dealt with the deceased’s account).
- In the case where the surviving spouse has inherited a “stocks and shares” ISA those “non-cash assets” may (subject to certain conditions) be transferred to their own ISA. Subject to that, the draft Regulations do not appear to require that the surviving spouse inherits the deceased’s ISAs in order for him or her to qualify for an increased allowance.
- In any case, the investment by the surviving spouse must be made within the “permitted period”. This period differs however depending on whether or not the survivor adopts the option of transferring inherited “non-cash assets” to their own ISA.
In the case of transferring “non-cash assets” from deceased’s stocks and shares ISA to an ISA in the survivor’s name
- In this case the “permitted period” is the period beginning with the distribution to the surviving spouse from the deceased’s estate of the “non-cash assets” and ending no more than 180 days later.
In other cases
- In this case the “permitted period” is the period beginning with the date of the deceased’s death and ending on the later of (a) the third anniversary of the date of death, and (b) 180 days after the administration of the estate is complete.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Neil Mackenzie: firstname.lastname@example.org