Previous complicated rules and lack of general understanding about ISA legislation in the event of the death of an ISA holder means spouses/civil partners do not always utilise the ISA Additional Permitted Subscription (APS) they are entitled to on the death of the first spouse/civil partner. This is also not helped by that not all ISA providers offer APS so it is often seen as too difficult to utilise and easier to have a lump sum.
Whilst the death of a partner is an emotional time and financial planning will be the last thing on their mind, spouses/civil partners could be missing out on valuable tax efficient savings within their own ISA. Whilst it is never easy dealing with a bereaved person, the role of the financial adviser can be invaluable at this time in helping the widow/er retain tax efficient investments and sorting the spouse/civil partners own inheritance tax planning and/or ensuring the Legal Personal Representatives (LPR) obtain the best investment outcomes for the estate.
What were the changes on 6 April 2018?
New HMRC regulations have extended the tax advantages of an ISA in the event of the death of an ISA holder.
An ISA is a tax-free way to save and invest. Tax is not payable on any interest, dividends, and gains on any assets/cash held within the ISA. For an ISA investor who died before 6 April 2018, the ISA loses the tax-free status, and income and capital gains tax will be payable on the assets held within the ISA from the date of death.
The ISA regulations changed on 6 April 2018 so that in the event of the death of an ISA investor, on or after this date, the ISA will be designated as a ‘continuing account of the deceased investor’ or ‘continuing ISA’. The ISA will continue to be exempt from tax until the earlier of:
When the ISA ceases to be a ‘continuing ISA’, the account will no longer be exempt from tax.
In both instances, the ISA can remain invested as long as the ISA provider’s terms and conditions allow it but no further subscriptions can be made.
Additional Permitted Subscription (APS)
Anyone who was married or in a civil partnership (and not estranged or separated) with an ISA investor who died on or after 3 December 2014 can now apply for an additional ISA allowance, known as the Additional Permitted Subscription. This is on top of their annual ISA allowance, (currently £20,000 for the 2018/19 tax year).
To be clear, what passes to the surviving spouse/civil partner isn’t the money in the ISA itself but an additional ISA allowance known as an Additional Permitted Subscription.
The amount of the APS will depend on when the ISA investor died. Where the ISA investor died before 6 April 2018, the APS amount will be the value of the deceased’s ISA as at the date of death. Where the death occurs on or after the 6 April 2018, the APS amount can be the higher of the date of death value or the value as at the date the ISA ceases to be a ‘continuing ISA’ provided they have not already made use of any APS. If the value has fallen at the time the ‘continuing ISA’ ceases, again provided they have not already made use of any APS, they will be entitled to the higher value at the date of death.
Where an investor held ISAs with several companies, a separate APS will be available for each.
How does APS work?
It is important to note that an APS does not have to be made using the deceased’s ISA money. It can be funded from the spouse/civil partner’s own cash or cash inherited from assets held elsewhere. The original ISA holdings do not automatically pass from one spouse/civil partner to another on death. This is because the deceased spouse/civil partner may have given the ISA investments to someone else in their will.
Once Probate has been granted, the assets within the deceased’s ISA can be sold closing the ISA account and then the cash used to fund the APS or the assets held in the deceased's ISA can be transferred into the surviving spouse/civil partner's APS ISA directly without needing to be sold. If choosing the last option, assets can only be transferred into an ISA with the same company with which the deceased held their ISA.
The surviving spouse/civil partner can use the allowance in one go or as separate lump sums although some providers may not be quite so flexible. For cash APS, there is a time limit and the APS must be used within three years of the date of death, or within 180 days of the completion of administration of the estate, if this is later. Where APS is made in the form of stock, re-registration of the deceased ISA investors’ holdings must be made within 180 days of beneficial ownership passing to the surviving spouse/ civil partner.
Once an APS has been made with an ISA manager, any further additional permitted subscriptions must continue to be made with the same ISA manager. Any unused balance cannot be transferred to another ISA manager. A transfer can be requested to another ISA manager once all APS has been made.
What are the benefits of the change in legislation?
The previous legislation was seen as unfair. The removal of the tax free environment for ISA’s on deaths before 6 April 2018 means that asset growth whilst administering the deceased’s estate does not have any tax benefits and the estate may be subject to tax. The spouse/civil partner wishing to utilise APS can only subscribe the value as at the date of death and can’t benefit from the asset growth.
There could be considerable tax savings particularly for large ISA holdings whilst the administration of the estate is ongoing which can often be a lengthy process. Asset growth between the date of death and closure can now be retained within the ISA environment. For a £100,000 ISA portfolio growing at 5% per year, the portfolio could end up with nearly £16,000 of growth over 3 years ignoring charges and this is now tax-free subject to the ‘continuing ISA’ rules.
Approximately 150,000 married ISA holders die each year so these changes will benefit spouse/civil partners by increasing the amount that they can save by offering the tax advantages in an ISA wrapper. The APS applies regardless of the total value of ISA’s held.
Before 6 April 2018, it may have been recommended that the assets within the ISA were cashed in as soon as possible after the date of death and held in a non-interest bearing account in order to mitigate any tax liability. Now, the LPR can continue to manage the ISA and time the sale of assets/closure of the ISA when the market is favourable.
The change in APS legislation means that the spouse/civil partner can effectively inherit the whole of their spouse/civil partner’s ISA and benefit from the on-going tax free status rather than just being granted an additional allowance of the value of the deceased’s ISA as at date of death. Before 6 April 2018, if the ISA value fell before the APS was made, the spouse/civil partner would need cash/assets to fund the difference to maximise the APS amount which they might not have available.
For companies, it means they do not need to convert the ISA to a tax paying account and issue statements of all taxable dividends and capital gains. The administrator of the estate does not need to collate the information for completing tax returns for the deceased.
Whilst the administration of the estate should be completed in a timely manner as far as possible, if there are issues, the ‘continuing ISA’ can remain invested for up to 3 years so the ISA benefits could potentially grow rather than languishing in a non-interest bank account.
What do Sanlam offer?
In the event of the death of a client who holds an ISA with us, the assets will remain invested and we will continue to manage the ISA in accordance with HMRC legislation and our own terms and conditions. Any management fees will continue to apply. Whilst, the servicing agreement will have been with the ISA holder, with the permission of the LPR’s we do offer the ability to take adviser fees from the deceased’s ISA to cover ongoing financial advice for the ongoing administration of the estate.
Sanlam Private Wealth accepts APSs. If the spouse/civil partner is an existing client, their current Portfolio manager will invest the APS in accordance with the clients overall investment strategy. New clients can invest their APS by taking out our award winning Whitelist ISA. More details can be found on our website or by calling our Client Contact Team on 01179 266366.
Where there is a surviving spouse/civil partner who wishes to utilise the APS allowance, for current Sanlam Private Wealth clients, we offer the facility to transfer the assets from the deceased’s ISA to an ISA for the surviving spouse/civil partner. If required, we are able to do this before Probate has been granted as long as we have seen the will and the ISA has been left to the spouse/civil partner or the ISA investor died intestate and under the rules of intestacy the estate automatically passes to the spouse/civil partner.
Where the assets are inherited by the surviving spouse/civil partner and they intend to sell them and use their APS allowance to invest the sale proceeds in an ISA, this option is only available after Probate has been granted. Similarly, where the ISA has been left to a different beneficiary under the will, the APS will need to be funded by cash.
This is of course all subject to the total APS allowance being used with Sanlam Private Wealth as per the legislation.
How can I make an APS with Sanlam Private Wealth?
Please contact us if you have a client who wishes to utilise their APS allowance. We will explain the process and arrange for any forms to be sent out.
 Data provided by Tax Incentivised Savings Association (TISA)