I recently encouraged my parents to write a will, which made me consider the ways couples can shelter investments from tax and make the most of their hard earned savings.
Many savers will already hold an individual savings account (ISA), with potentially several per household if a partner holds them too. So twice the saving power and twice the tax efficiency.
The value of ISAs can be huge if they’ve been held since the launch of personal equity plans in 1987. Clients could have saved in excess of £260,000 based on historic subscription limits, with added investment growth meaning clients could be sat on a very healthy nest egg. So it’s just as important that the ISA is dealt with efficiently after death as it is in life.
Thankfully the rules surrounding ISAs have improved, particularly for deaths after 6 April 2018 where the ISA becomes a ‘continuing account’. This change means the ISA retains the tax advantages after death, which is great news for savers and their spouses or civil partners, as before April 2018, any interest, dividends or gains in respect of investments that arose after the date of death were not exempt from tax.
In addition, since 6 April 2015 the surviving spouse of the deceased is entitled to a one-off additional subscription allowance on top of their usual annual ISA subscription limit. The maximum amount of this additional permitted subscription (APS) is the higher of the value of the deceased’s ISA at their date of death or at the date the tax advantages of the ISA cease (usually the date the account is closed). This can be crucial for surviving spouses as they can generally retain cash and/or investments in a tax free wrapper.
Note there are time limits for APS. If made in cash, the allowance is available for three years after the date of death or, if later, 180 days from completion of the administration of the estate. If inherited ISA investments are instead being used to fund the APS, the timescale reduces to 180 days from the investments passing to the surviving spouse.
The rules state ISA managers have discretion not to accept APS, or only to do so in particular circumstances, so it’s worth checking ahead of time the stance of each manager. This is particularly important where ISAs are held with multiple managers. An important point to bear in mind is that once the APS has been paid, the surviving spouse is free to transfer their ISA to another manager. This is then classed as a normal ISA transfer.
Despite being such a clear tax perk the uptake since 2015 has been very low. For 2017 – 2018 only 21,000 APSs were reported according to HMRC, while Tax Incentivised Savings Association estimate up to 150,000 married ISA holders die every year. There’s a strong disconnect suggesting as few as 14% of surviving spouses have made use of the tax free allowance.
Allegedly nothing is certain but death and taxes, while you can’t avoid the former you can mitigate the latter with some clever planning.
Danielle Byrne is technical resources consultant at AJ Bell