What You Need to Know About the ‘Inheritance ISA’ (UK)

why you need to know about the inheritance ISA in UK

By Ryan Smith –

The Individual Savers Account (ISA) is one of the most widely used savings vehicles in the UK. Despite current interest rates being at record lows, it’s still widely used due to its generous tax breaks offered to savers.

Last December, in his autumn budget statement the Chancellor, George Osborne announced plans for the new ‘inheritance ISA’ – yet is’ now been revealed that very few widows or widowers have taken up the opportunity.

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The inheritance ISA – officially known as an ‘additional permitted subscription’ – lets you inherit the tax-free status of savings held within the account following a spouse or civil partner’s death.

Currently you can save up to £15,240 per year as either cash or shares into an ISA. The interest built up on this will all be paid completely free of tax, with a new £15,240 tax-free savings allowance being added to your account every April. Previously, were you spouse or partner to pass away, you would inherit the ISA savings, but not the tax-free wrapper on interest. The new rules allow you to inherit an allowance equivalent to the value of their tax-free pot.

But despite seeking financial advice from their banks, many are either being told conflicting information about the process, or simply aren’t claiming the allowance at all.

Case Study

Graham had saved up £60,000 in a cash ISA over the years before his death. It was earning 2% interest, meaning he was gaining an additional £1,200 every year completely free of tax. His wife Barbara inherited the cash in his ISA following his death.

Under previous rules, Barbara would have lost the tax-free allowance that Graham had. So despite Barbara inheriting the £60,000, because Barbara was a higher rate (40%) income tax payer, she would have had to pay £480 worth of tax on the £1,200 interest.

But because Graham passed away after December 3rd 2014, Barbara can inherit the tax-free allowance he’d built up in his ISA, as well as the cash within it.

Barbara is just one of around 150,000 people who can benefit from these changes.

Your ‘Need to Know’ Guide

  • Contact your partner’s ISA provider following their death: the ISA allowance needs to be passed on to you as it doesn’t not get inherited automatically
  • The tax-free allowance can only be used by you: it is not transferrable.
  • The ISA allowance is the equivalent to your partner’s ISA value at the time of death. Interest earned and investments’ values will be calculated on the date of death.
  • You must claim the ISA allowance within three years of your partner’s bereavement, or 180 days after the completion of the administration of the estate – whichever of the two is later.
  • You can open a new ISA with the total value of you partner’s ISA as a tax-free allowance, or if you’re with the same provider they can top up your own tax-free allowance.
  • Due to the complexity of the calculations, investment fund ISAs will usually require the investments to be cashed in before you can inherit the value as a tax-free allowance.
  • If the assets within the ISA have been spent (ie. On funeral costs), or the actual funds have been left to a different beneficiary (such as a child or grandchild), as their partner you’re still entitled to their tax-free allowance to top up your own.
  • Inheritance ISAs can be transferred to different providers in the future if required, for example if there are better interest rates to be found.

Ryan Smith is part of the content development team at Local Financial Advice, connecting people with local financial advisors in their area.

 

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What You Need to Know About the ‘Inheritance ISA’ (UK)
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