New rules which change the way Individual Savings Accounts (‘ISAs’) are treated on the death of a spouse or civil partner (referred to collectively throughout as ‘spouse’) came into effect on 6 April 2015 after being announced in the 2014 Autumn Statement.
In broad terms, the new rules allow the value of the ISA accounts held by a spouse at the time of their death to be used as an additional allowance for the surviving spouse. The rules apply to deaths on or after 3 December 2014 and offer a comforting opportunity for a surviving spouse to retain tax free income and, in the majority of cases, the status quo which they had established within the joint financial arrangements with their spouse.
The rules, however, are not straightforward and differ depending on whether the ISAs held by the deceased spouse were in cash or non-cash assets (typically stocks and shares):
For cash ISAs, the equivalent value to the ISA accounts held by the deceased at the date of their death is available to be invested by the surviving spouse, whether or not the account is left to them.
For example, if Mr Y held £40,000 in a cash ISA which passed to Mrs Y on his death, then Mrs Y could retain this balance within the ISA. However, if Mr Y had left his ISA to his children, Mrs Y would still be able to use £40,000 of her own money (or other monies inherited from her husband) to open a new cash ISA.
The rules for non-cash ISAs are a little more complex in that the equivalent value to the non-cash ISA accounts is still available to the surviving spouse. However, it can only remain in the form of a non-cash ISA if that actual account passes to the surviving spouse.
If we again look at Mr and Mrs Y, if Mr Y had £40,000 in a non-cash ISA account and the account passed to Mrs Y, then she could retain the balance of the non-cash ISA within those assets (typically stocks and shares). However, if the non-cash ISA account did not pass to Mrs Y, but instead passed to her children, then Mrs Y would still have the £40,000 allowance to invest in an ISA (again using either her own money or other monies inherited from her husband), but it would have to be invested in a cash ISA, as opposed to a non-cash ISA.
Depending on the returns generated from the non-cash ISA, losing the ability to hold monies in this way could greatly affect the income of the surviving spouse.
If you are dealing with the estate of a deceased loved one it is therefore important to seek advice in relation to the administration of the estate to ensure that opportunities relating to transferable ISA allowances are utilised within the given time limits that apply.
Similarly, if you currently hold ISA accounts it is important to review the terms of your Will (or make a Will if you do not have one) in order to ensure that any transferable ISA allowances are available in the most efficient manner following your death.
At Hay & Kilner, our Private Capital team have extensive experience in both estate administration/probate matters and Will drafting, and are happy to provide advice and assistance in these matters.
For further information, contact Alice Clewes, Partner at Hay & Kilner
Call: 0191 232 8345