The little-known ISA rule

Did you know that you can inherit ISA savings? New rules initially came into force in April 2015, and were updated in April 2018, that effectively mean ISA assets can now be passed on to spouses or civil partners and retain their tax-friendly status.

Under the previous system, when someone died any savings held in an ISA automatically lost their tax-free status, and the tax benefits were lost forever. This meant that the surviving partner would have to start paying tax on any returns or income earned from these savings and investments, which could add up to a significant sum if the ISA holder had been saving for many years.

This allowance is called the Additional Permitted Subscription (APS) and is available to a surviving spouse or civil partner. Essentially, the rules mean that the tax-efficiency of the deceased’s ISA won’t be lost when the surviving partner makes use of their APS allowance, and that they’ll continue to benefit from the tax efficiencies of the investments that could well have been saved together.

In the event of death after 5 April 2018, the APS value is the higher of value of the deceased’s ISA holdings at either date of death, or at completion of the estate administration or earlier closure. APS counts as a previous year ISA subscription and is available to the surviving partner on top of their own allowance. Where the deceased held ISAs with a number of different managers the widowed partner will have APS limits with each manager.

This change in rules has opened up a new world of possibilities in financial planning, particularly around retirement and estate planning. Even at modest levels, this additional allowance can save significant tax for the surviving spouse or civil partner.

If you need to know more, please do get in touch with us.

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