What happens to an ISA when someone dies?
When an ISA holder passes away, a surviving spouse or civil partner can retain the benefits through an Additional Permitted Subscription (APS). This allows them to make a one-off ISA contribution equal to the value of the deceased’s ISAs. These rules can be a little complex but given the potentially substantial tax advantages it’s worth understanding the nuances.
Inheriting an ISA from a spouse
When an ISA holder passes away, their assets are distributed according to their will or intestacy rules. No matter how the assets are divided, in most cases a surviving spouse or civil partner can inherit the tax benefits of the deceased’s accumulated ISA through an 'Additional Permitted Subscription' or APS.
It’s not possible to transfer an ISA to a spouse on death – at least not directly. Instead, the APS allows the spouse or civil partner to make a one-off ISA contribution equal to the value of the deceased’s ISAs.
If there is no surviving spouse or partner, and the assets are left to another beneficiary such as a child, there is no APS available, and the tax benefits of the deceased’s accumulated ISAs cannot be passed on. The beneficiary will not benefit from tax-free income and growth from the assets, and they may have to declare them in their tax return. However, they could look to sell and repurchase any investments in an ISA using their own £20,000 a year ISA allowance in a process known as a ‘Bed and ISA’.
It is also important to note that ISAs are subject to inheritance tax (IHT) in the normal way and form part of a deceased’s estate on death.
How much is an ISA Additional Permitted Subscription?
Introduced in April 2015, an APS allows a surviving spouse or civil partner to ‘inherit’ the tax benefits of their partner’s ISA savings and investments on death. They are one-off ISA allowances available to the surviving spouse or civil partner that can be made in addition to their annual ISA allowance.
The APS is equal to the total value of the deceased’s ISA accounts and can be made to a new or existing Cash ISA, Stocks and Shares ISA or Lifetime ISA (if eligible, but it does count towards the individual’s £4,000 per annum limit) – or a combination.
Who is eligible for an Additional Permitted Subscription?
Anyone whose spouse or civil partner died on or after 3 December 2014, provided the couple were living together at the date of death.
How does the process of using an Additional Permitted Subscription with Charles Stanley work?
If the deceased’s ISA is already with Charles Stanley, the existing assets and/or cash can be directly used for the APS. We require completion of an APS form as well as Grant of Probate and a signed letter from the Executors.
If the ISAs are held elsewhere, we require an APS application form and transfer form, which are available on request from our Helpdesk. We can then confirm the value of any additional permitted subscription with the existing ISA provider(s). Once confirmed, the APS ISA can be funded from a bank account in the usual way. It is not possible to transfer holdings to use the allowance.
To apply for an APS ISA with Charles Stanley, please contact our Helpdesk on 0131 550 1234 for the forms.
What if the spouse or civil partner had ISAs with several providers?
The surviving spouse or civil partner will qualify for an APS with each provider with which their spouse/partner held an ISA. Each APS can be used with the existing provider or another provider. Once part of the APS has been used with the existing provider, the remainder cannot be used with a different provider.
Can ISA investments be transferred on death into a surviving spouse’s ISA?
Yes, for assets transferred to an ISA with the same ISA provider. However, the option of a subscription of shares or funds is not available if the surviving spouse or civil partner makes an APS to an ISA manager other than the one who held the deceased’s ISA, it must be made in cash.
APS payments in cash can be made to any type of ISA in the usual way, including by cheque or bank transfer, and do not have to be made using money directly from the inherited ISA assets.
What happens to the ISA during the administration of the estate?
The ISA becomes a ‘continuing account of a deceased investor’, or a ‘continuing account’ for short, for up to three years while the administration of the estate is completed. No money can be paid into it from this point, but it will continue to benefit from the tax advantages of an ISA, so any growth, income or interest will remain tax-free.
Active management of the investments already held within the account may continue. However, it is not possible to request a transfer to an alternative ISA manager; nor is it possible to change a Stocks & Shares ISA into a Cash ISA or vice versa with the same ISA manager.
Is there a time limit to use an Additional Permitted Subscription?
For cash subscriptions, the APS is available for three years after the date of death, or for up to 180 days after the administration and distribution of estate assets is complete – whichever is the later. Should the spouse or partner wish to transfer any holdings such as shares or funds from the deceased’s ISA to their own, it must be done within 180 days of the beneficial ownership transferring to them.
How is the APS allowance calculated if the assets in the ISA have risen/fallen in value?
The APS will normally be the value of cash and/or investments at the time they are passed on, or the value of the ISA on the date of death – whichever higher.
When using an existing ISA provider, if the value of the assets has decreased, they can all be transferred and a cash subscription can be made to ‘top up’ the APS to the value at the date of death.
What happens to an ISA on death when there is no eligible spouse/APS?
If there is no surviving spouse or partner, and the assets are left to another beneficiary such as a child, there is no APS available. However, ISA investments still retain their tax-exempt status in respect of income and capital gains for a limited period following the death of the account holder and during the administration of the deceased's estate. The exemption lasts for a maximum of three years after the account holder's death and applies only to investments retained in the ISA. As explained above, whilst the exemption has effect, the account is designated a 'continuing account’.
For Capital Gains Tax (CGT) purposes, the assets previously housed in the deceased’s ISA are treated as having been acquired by the beneficiary at the market value at the date of transfer. If the transfer occurs after the exemption ceases to have effect, the beneficiary is treated as having acquired the investment at the date of transfer but at its market value at the time the account ceased to be a continuing account. So, the relevant value for CGT purposes is at the date of transfer or the 3-year anniversary, whichever comes first.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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