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New ISA death benefit rules
A substantial benefit especially for the elderly

The end of the tax year

Every industry has its pinch points. For accountants it is usually the end of January when all the personal accounts fall due and tax has to be paid. For financial planners the busy time is the end of the tax year when investors rush to make their last ISA contributions before the tax year ends.  This year’s ISA allowance is £15,240 for adults and £4,080 for Junior ISAs.

Historically, there has always been little direct benefit for non-tax payers to use their annual ISA allowance. We are all becoming more familiar with the pension changes that have been introduced. The wider public are not as aware of the changes to the ISA rules that came into effect in April last year.

Additional Permitted Subscriptions [APS]

This new allowance has made a significant difference to financial recommendations. If we reflect, we see that there is often a dominant pension income earner in most households. The effect is that this person will be paying income tax at 20% or higher whilst the second person does not pay tax at all. To mitigate this imbalance, assets that attract tax on interest are invested in the non-tax payers’ name effectively stripping the taxpayer of assets. Life changing events, such as needing care, make placing all the assets in the non-taxpayer name a risky move.  If the assets are equalised between both partners, the taxpayer will generally use ISAs to mitigate tax and the non-taxpayer would continue to use standard investment accounts, as ISAs offer no tax advantage to non-taxpayers.

Another major life change occurs if the main income earner dies first. Many pensions and annuities only provide a 50% spousal benefit and some stop altogether. [One of the reasons more people are considering Flexi-Access Drawdown].  At that time, the non-taxpayer may suddenly become a taxpayer as result of receiving pension death benefits. This can cause real problems, because not only has the household income gone down, but all savings are now also subject to income tax at a time when the need for income is at a premium.

 

 

This is where the Additional Permitted Subscription comes in. From April 2015 anyone who died after December 3rd 2014 can pass the value of the ISAs to their partner. In other words, If you had a number of ISAs with a total value of £200,000 on the day of your death your partner will now receive a one off Additional Permitted Subscription equal to the value of your ISA on the date of your death.

The APS allowance

The APS allowance is only available to married couples and those in a civil partnership. You do not have to receive their actual ISAs. They may have been gifted by the Will to a third party. The APS allowance is still available to the widow or widower to invest their capital. You should seek confirmation of the ISA value at the date of death from all ISA providers as part of the probate valuation process. Once you have all the confirmations you will be able to make an ISA subscription equal to your partner’s ISA value at the time of death.

Some providers of Stocks and Share ISAs will allow internal ‘In Specie’ transfers of the existing assets. Where the value of the assets don’t exceed the APS allowance a cash top up is possible if the values have fallen as may currently be the case.
The combination of PEPs, Single Company PEP, Cash ISAs, TESSAs, TOISAs and Stocks and Share ISAs mean that it is not unusual to come across ISAs in excess of £500,000.00. Prior to the introduction of the APS allowance, these assets would have fallen back into the tax environment.

If you do not have a large ISA holding it is now easier to build substantial tax efficient savings for the benefit of the remaining partner later in life. With the current allowance at £15,240.00 it is possible for couple to build a £150,000.00 tax efficient lump sum for the dependant partner in just five years. By building up tax efficient savings in the non-taxpayers name, not only will they avoid tax should they become a taxpayer later in life, their tax paying partner will also benefit from greater tax efficiency if the non-taxpaying partner dies before them due to the APS allowance.
I should advise that not all ISA providers would allow consolidation of a number of ISAs under the APS rules and there are various time limits to be aware off, therefore you may wish to seek advice from a qualified wealth manager to simplify the process.

 

 
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