Insights

Starting from 6^th April 2018, it will be possible for married couples and civil partners to leave their spouse an ISA when they pass away and thereby benefit from an additional tax break potentially worth thousands of pounds.

Currently, when a spouse leaves their partner an ISA in their will, the full value can be inherited without triggering any tax. This because the surviving spouse is granted an additional one-off ISA allowance, known as an ‘additional permitted subscription allowance’. This covers the value of whatever was held in the ISA at the time of death.

How to pass on an ISA tax free

However, any increases in value between the date of death and completion of probate are not currently tax free and during a lengthy probate application, the value of an ISA can potentially increase significantly. Until the start of the new 2018-19 tax year, this increase is taxable because tax free ISA wrapper effectively ceases to exist on death. This changes from 6^th April 2018 when any increases in value can be passed on to a surviving spouse without extra tax liability.

Given that it can take months or sometimes even years for a grant of probate on complex  estate, the potential savings to be seen from this change in tax policy may be significant. Consider the following example:

Mrs Brown inherits her husband’s ISA which is valued at £1m on his death. He doesn’t leave a will and it takes 2 years to obtain grant of letters of administration, during which time the value of the ISA has increased by 10%.  Mrs Brown is a higher rate tax payer and has to pay capital gains tax at 20% on the increased of £100,000 in value, resulting in a £20,000 liability. After 6^th April 2018, no additional tax would be due.

Under the new rules, Mrs Brown can potentially keep the ISA and allow it to continue to increase in value without incurring any additional tax - either until probate is completed, the ISA is closed, or 3 years after the original account holder's death – whichever is sooner.

Who can benefit from new tax free transfer rules?

This change will benefit a significant number of people as HM Revenue and Customs (HMRC) report that around 300,000 ISA investors die each year. Our advice to all taxpayers with investments is to write a will, maintain clear financial records and ensure your financial affairs are well managed.

Probate is the official process of administering the estate of a person who has died, dealing with the tax position and ensuring the net estate is distributed to those who will inherit, after discharging any debts and liabilities. It can be complex, and having a reliable, trusted advisor, someone you know well and who can deal with all matters, takes away the worry at what is already a stressful time.

If you would like help to obtain a grant of probate or need inheritance tax planning advice, please contact us by emailing partners@rjp.co.uk