Details have begun to emerge on how the new inheritable ISA rules will operate. And the good news for financial planners is that it will be achieved by an increased ISA allowance for the surviving spouse rather than the actual ISA assets themselves. This means clients won't have to revisit their wills.
How the rules will work
If an ISA holder dies after 3 December, their spouse or civil partner will be allowed to invest an amount equivalent to the deceased's ISA into their own ISA via an additional allowance. This is in addition to their normal annual ISA limit for the tax year and will be claimable from 6 April 2015.
This means the surviving spouse can continue to enjoy tax free investment returns on savings equal to the deceased ISA fund. But it doesn't have to be the same assets which came from the deceased's ISA which are paid into their spouses new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any assets.
What it means for estate planning
By not linking the transferability to the actual ISA assets, it provides greater flexibility and doesn't have an adverse impact on estate planning that your client may have already put in place.
For example, had it been the ISA itself which had to pass to the spouse to benefit from the continued tax privileged status, it could have meant many thousands of ISA holders having to amend their existing Wills. Where the spouse was not the intended beneficiary under the Will or where assets would have been held on trust for the spouse - a common scenario - the spouse would miss out on the tax savings on offer.
Instead it's the allowance which is inherited, not the asset. This means that, even in the scenarios described above, the spouse can benefit by paying her own assets into her ISA and claiming the higher allowance. And the deceased's assets can be distributed in accordance with their wishes, as set out in their Will.
The tax implications
The tax benefits of an ISA are well documented. Funds remain free of income tax and capital gains when held within the ISA wrapper. And it's the continuity of this tax free growth for the surviving spouse where the new benefit lies. It's an opportunity to keep savings in a tax free environment.
But the new rules don't provide any additional inheritance tax benefits. The rules just entitle the survivor to an increased ISA allowance for a limited period after death. The actual ISA assets will be distributed in line with the terms of the Will (or the intestacy rules) and remain within the estate for IHT.
Where they pass to the spouse or civil partner, they'll be covered by the spousal exemption. Even then, ultimately the combined ISA funds may be subject to 40% IHT on the second death.
With ISA rules and pension rules getting ever closer, it may be worth some clients even considering whether to take up their increased ISA allowance if the same amount could be paid into their SIPP. This would achieve the same tax free investment returns as the ISA and the same access for client's over 55. But the benefit would be that the SIPP will be free of IHT and potentially tax free in the hands of the beneficiaries if death is before 75.
The new allowance will be available from 6 April 2015 for deaths on or after 3 December. Draft legislation is expected before the end of the year and the final position will become clear after a short period of consultation.
The new inherited allowance will complement the new pension death rules - a welcome addition to the whole new world of tax planning opportunities for advisers and their clients from next April.
Source: Standard Life
Sam: 9th Dec 2014 15:22:00
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