Following on from our last blog post about Flexible ISAs, we are continuing to look at recent ISA changes. In part 2, it’s the turn of the Inherited ISA. So, what exactly is an Inherited ISA?
An introduction to Inherited ISAs
In 2015 a rule was introduced to make it possible for an individual to inherit the ISA of a spouse or civil partner who passes away, with the tax-free benefits remaining in place.
Previously, once an owner of an ISA died, the tax-free status was dropped. The surviving partner would potentially, therefore, have to pay tax on returns or income earned from it. This could prove to be very expensive for those who had been saving for years.
The inheritance rule even extends in some respects to Lifetime ISAs. Should someone who holds a LISA die or become terminally ill, a withdrawal from the fund could be made without a penalty charge.
How inheriting an ISA works
When an individual passes away, the spouse or civil partner is given an additional allowance to the amount that they will be inheriting from an ISA. Also known as an ‘additional permitted subscription’ (APS). The APS can only be used once but if the deceased owns multiple ISAs, the surviving spouse will get an allowance for each one.
This APS allows the surviving partner to transfer the money from the ISA of the deceased into one with their own name.
If someone passes away with £30,000 in an ISA, their surviving partner will have their own £20,000 yearly ISA allowance plus an additional allowance for the £30,000 ISA they are going to inherit.
Even if the deceased partner has specified the money in their ISA should go to someone else in their will, their spouse will still benefit from the additional allowance. They’ll just have to use their own money to make up the funds.
The 2018 update to inheriting an ISA
Once an ISA has been inherited the surviving partner can choose where to transfer the inherited savings:
- They can be kept with the current provider.
- They can be put with the surviving partners provider.
- A new cash ISA or stocks and shares ISA can be opened.
You may be thinking, ‘but wait, I thought you could only have one cash ISA and one stocks and shares ISA per tax year?’ Well, that’s correct but these rules don’t apply if you are opening an ISA purely to transfer inherited savings.
It is worth bearing in mind that it’s not compulsory for providers to accept additional allowance payments. According to Which? just 45% of the 349 fixed and variable rate cash ISAs on the market will accept transfers from inherited ISAs. So be sure to do your homework before attempting to transfer funds from an inherited ISA.
On the other side of the coin, there are some providers who have products specifically designed for transferring Inherited ISAs. It’s worth researching who these are and what they can provide should you have an ISA you are looking to transfer.
Are there any differences for a stocks and shares ISA?
A stocks and shares ISA is treated in the same way as a cash ISA. The surviving partner gets an additional allowance to invest the inherited ISA in either another stocks and shares ISA or a cash ISA.
They could either:
- Sell investments for cash
- Transfer investments as they are – this must be done within 180 days of inheriting the funds and can only be done within the same provider.
Are there time restrictions?
The passing of a loved one is always going to be an upsetting time. Thankfully, the APS allowance is available for three years after the owner passed away, or 180 days after the estate has been administered if it takes longer than three years. This gives the surviving partner plenty of time to sort out their loved one’s affairs without a stressful time pressure.
Advice is key
It’s always wise to seek advice from an independent financial adviser. Especially if you find yourself in the upsetting position of inheriting the ISA of your partner. It will be a distressing time as it is, so you may find talking to a professional about your options a big relief. The extra help could really take a weight off your shoulders.
Here at Face to Face Finance, we can help you understand your options. You can either arrange to pop into our office or we can come and visit you in your home. Simply get in touch with one of our friendly team and we can find a time to suit you.