Spouses will soon be able to inherit the whole value of their deceased partner’s Isas tax free, including any growth in assets following their death.
At present, savers and investors can pass on the full value of their Isa to their partner, using the additional permitted subscription (APS) system.
This means whatever was in the Isa at the time of death is added to the surviving partner’s Isa allowance.
However, a gap in the rules means any growth in the Isa between the date of death and the formal closure of the estate (which could take several months) is subject to tax.
The government has now moved to extend the allowance and from 6 April 2018 any growth in the Isa will remain tax free and can be transferred to the surviving partner.
From that date, once a person dies their Isas become a ‘continuing Isa’. While no new funds can be paid into the account, the holdings will retain their tax-free status.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “Being able to pass on the value of your Isa to your spouse has been a godsend for their family, who can ensure this portion of their savings and investments stay in a tax-efficient environment.
“Unfortunately, the administration of a complex estate can take months, or even years. During this time, the Isa investments may continue to grow. This causes two headaches.
“First, during the administration of the estate, growth in the Isa is being exposed to taxation. Second, the fact that the assets may be growing and the Isa wrapper isn’t, means that the surviving spouse may not be able to rewrap all of those assets in an Isa once the administration of the estate is complete.
“The changes in April will cure both these headaches, and iron out what has been a clunky and potentially expensive wrinkle in the rules.”