What happens to our Isas and Sipps when we die - will there be inheritance tax to pay?

27 March 2020

Q

My wife and I both have Isas and Sipps. It is possible we won’t spend them all before we die. What happens when one spouse dies? Are they passed untaxed to the other partner?

From
JY/Winchester

A

It is possible for a surviving spouse or civil partner to ‘inherit’ both their deceased partner’s Isas and self-invested personal pension plan, or Sipp, while maintaining the tax-free status of the money held in them.

For Isas, this process is referred to as an ‘Additional Permitted Subscription’ (APS) and all the money inherited from the deceased spouse can be invested into a new or existing Cash Isa, Stocks and Shares Isa or Innovative Finance Isa. If the deceased partner had Isas with a number of different providers, the surviving spouse or civil partner will need to contact each provider individually.

For personal pension plans and Sipps, the entire fund value (irrespective of how much the beneficiary already holds in their own pension plan) can be passed on tax-free and outside an individual’s estate for inheritance tax planning purposes in the form of a ‘survivor’s pension’.

Furthermore, all the time there is money still in the plan, survivor’s pensions can be inherited more than once, that is passed on from husband to wife, wife to children, children to grandchildren.

Whether or not tax is payable when the beneficiary starts to draw money out of the pension plan will depend on the age at which the last owner of the pension died. If the previous owner died before the age of 75, not only will any growth achieved be tax-free, all income or capital withdrawn by the beneficiary will also be tax-free.

This means that, while they were not designed for multi-generational inheritance planning, under the current rules, pensions are a really good option for passing on money that you don’t expect to spend.

Unfortunately, it is not possible to do the same with Isas.

Money inherited from Isas will form part of the deceased’s estate for inheritance tax calculations and future income and capital is taxable in the recipient’s hands, unless the beneficiary invests their inheritance into their own tax-free savings’ allowances that they are personally eligible for.

Generally speaking, spending money held in Isas before starting to make large withdrawals from a Sipp makes good sense for anyone expecting to leave a reasonably sized estate to their beneficiaries.  

How are ISAs passed on to a surviving spouse?

With the additional permitted subscription (APS) allowance, the surviving spouse needs to contact the Isa provider which will ask for an original or certified copy of the death certificate, before providing details of the value of the deceased partner’s Isas on the date of death.

This sum of money can then be used to contribute to a new Isa in the surviving spouse’s name as an APS contribution.

The APS allowance must be claimed by the surviving spouse, using the appropriate forms, within three years of the date of death, or if longer, 180 days after the estate has been administered.

Ray Black is an independent financial adviser at Money Minder.

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