Proposals for new inheritable ISA

Details have begun to emerge on how the new inheritable ISA rules will operate.

The good news is that there will be an increased ISA allowance for the surviving spouse rather than rules covering the actual ISA assets themselves. This means there will be no need to review or alter wills.

If an ISA holder dies on or after 3 December 2014, their spouse will be allowed to invest an amount equivalent to the deceased’s ISA into their own ISA via an additional allowance. This is in addition to their normal annual ISA limit for the tax year and will be claimable from 6 April 2015.

This means the surviving spouse can continue to enjoy tax free investment returns on savings equal to the deceased ISA fund. But it does not have to be the same assets which came from the deceased’s ISA which are paid into their spouses new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any assets.

By not linking the transferability to the actual ISA assets, it provides greater flexibility and does not have an adverse impact on estate planning that may already be in place.

For example, had it been the ISA itself which had to pass to the spouse to benefit from the continued tax privileged status, it could have meant many thousands of ISA holders having to amend their existing Wills. Where the spouse was not the intended beneficiary under the Will or where assets would have been held on trust for the spouse – a common scenario – the spouse would miss out on the tax savings on offer.

Instead, it is the allowance which is inherited, not the asset. This means that, even in the scenarios described above, the spouse can benefit by paying her own assets into her ISA and claiming the higher allowance. And the deceased’s assets can be distributed in accordance with their wishes, as set out in their Will.

The tax benefits of an ISA are well documented. Funds remain free of income tax and capital gains when held within the ISA wrapper. And it is the continuity of this tax-free growth for the surviving spouse where the new benefit lies. It is an opportunity to keep savings in a tax-free environment.

But the new rules do not provide any additional inheritance tax (IHT) benefits. The rules just entitle the survivor to an increased ISA allowance for a limited period after death. The actual ISA assets will be distributed in line with the terms of the Will (or the intestacy rules) and remain within the estate for IHT.

Where they pass to the spouse or civil partner, they will be covered by the spousal exemption. Even then, ultimately the combined ISA funds may be subject to 40% IHT on the second death.

The new allowance will be available from 6 April 2015 for deaths on or after 3 December 2014. Draft legislation is expected before the end of the year and the final position will become clear after a short period of consultation.

[This article has been sourced from Standard Life plc. The article is for information only and does not constitute advice. If you would like advice, please get in touch on 01392 875500 or info@SeabrookClark.co.uk]

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