The new tax year will bring many changes to our finances. One in particular will allow surviving spouses to inherit ISA savings on death and continue to benefit from tax-free returns for the first time.
This will be a big relief to the older generation of ISA clients who tend to take income from their ISA portfolio, as the surviving spouse can now continue to enjoy this income tax free. Women will be among the biggest beneficiaries because, typically, they outlive their husbands.
The Treasury and HM Revenue & Customs have now set out the full guidelines on how the inheritable ISA regime will work.
Here’s what you need to know:
What does the change mean?
From April 2015, your ISA savings will not lose their tax-free status when you die. The status will be retained by providing an additional one-off allowance to the surviving spouse to be used on or after 6th April 2015.
According to the Treasury, 150,000 people per year lose out on the tax advantages of their partner's ISA when their partner passes away.
This change is just part of a raft of policies that reward savers, including a new ‘personal savings allowance’ that means the first £1,000 of interest on savings will not be taxed for basic-rate tax payers (or the first £500 for higher-rate tax payers).
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Will this affect how much I can save into an ISA?
From April 2017, you can save £20,000 a year into a cash ISA, a stocks and shares ISA, or a combination of the two. Any ISA inheritance will form an additional allowance that's equal to the value of the ISA at the holder's death, which will be added on to the survivor's own ISA allowance.
Read our guide to the different types of ISA
Another of the changes announced in March 2015 means that you are able to withdraw and replace money from an ISA without losing the tax benefits, as long as the money is replaced in the same tax year that it is withdrawn.
Do I have to keep the money with the same ISA provider?
While the original proposal held that the surviving spouse had to use the same ISA manager as the deceased's ISA, it will instead be possible for the surviving spouse to use the ISA of their choice.
Read about transferring an ISA
What does this mean for inheritance tax?
This change will not save inheritance tax for anyone because all assets transferred between spouses on death have always been free of inheritance tax.
The changes announced are to the ISA tax wrapper which previously could not be transferred.
Paul Lewis' guide to inheritance tax (IHT)
Who will benefit from the new rules?
The rules include those in civil partnerships but have not been changed for unmarried couples who still cannot benefit from this tax break.
Are ISAs still relevant?
Watch out for the small print
Assets will be liable to income tax and capital gains tax from the date of death to the distribution of the value at probate.
Plus, if the value of the ISA falls between the date of death and the date of distribution, there will be a shortfall between the value of assets transferred and the special ISA allowance. The surviving spouse could choose to make up the difference with additional money.
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