ISAs – Treatment Of Accounts Following Death

Last month’s update included details of the proposed changes to pension death benefits from April 2027. It is also important to consider the options available upon the death of an Individual Savings Account (ISA) holder. The tax changes introduced in April 2017, coupled with the ability for spouses to use the Additional Permitted Subscription (APS), means careful planning is essential to maximize the available tax advantages.

Following the death of an ISA investor, the assets held in the ISA account automatically acquire the status of a “continuing account of a deceased investor” (CADI).

What is the Tax Position of a CADI?

• For inheritance tax purposes, the value of the assets held in the ISA are valued as at the date of death. Assets that qualify for business relief can be passed on free from inheritance tax (IHT) until 5 April 2026. As announced in the most recent Budget, after this date, they will be subject to IHT at a rate of 20%. The usual spousal IHT exemption is also available.
• Income tax accruing after the date of death is waived whilst the investments remain in the CADI.
• Capital gains arising after the date of death are tax-free whilst the investments remain in the CADI.
• Note, whilst the tax-exempt status continues after death, it is not possible to pay any form of subscription (including replacement subscriptions on withdrawals made by the deceased prior to their death).

The CADI status of the ISA can remain in place until the earlier of:

• The completion of the administration of the deceased’s estate.
• The third anniversary of the date of death.
• The closure of the account.

It is usually the case that the trigger point for ending the CADI status is the closure of the account and this can have implications in circumstances where a surviving spouse wishes to utilise the “Additional Permitted Subscription” (APS).

What is an APS?

An APS is an additional subscription amount that is available to a surviving spouse or civil partner following an investor’s death and can be utilised in addition to the survivor’s own ISA subscription allowance. This allowance was introduced to enable a surviving spouse or civil partner to continue benefiting from the tax-free income and growth that was available from the deceased’s ISA.

A separate APS allowance will be available from each provider where the deceased held an ISA account. The APS can be used with:

• The original ISA provider holding the deceased’s ISA. In this case, the APS could be paid using either inherited ISA assets or cash.
• A different ISA provider who is capable of accepting APS amounts. In this case the APS amount must be in cash. This does not need to be cash from the deceased’s ISA.

If you want to use a different provider’s APS with Transact, the surviving spouse/civil partner can complete our Transfer of Additional Permitted Subscription (APS) Instruction (Form T051) that is available online. We can submit this form to the current ISA provider to obtain details of the APS amount and once confirmed the APS can be paid using cash from any source.

An APS amount can be paid in stages although once a payment has been made to a provider, the remaining APS allowance related to that payment can only be made with the same provider. The amount of the APS will be the higher of:

• The value of the deceased’s ISA at the date of death.
• The closing value of the CADI.

Consequently, it is best to avoid taking any action that might reduce the value of the CADI prior to closure (e.g. taking partial withdrawals). It is also usually best for the surviving spouse or civil partner to avoid using the APS prior to the closure of the CADI, otherwise they will be restricted to using the value of the deceased’s ISA at the date of death (which might be lower than the closing value of the CADI).

There are time limits to making an APS depending on the form of the subscription.

• In specie APS (which must be made with the provider holding the CADI using only assets inherited from the deceased’s ISA) must be made within 180 days of the beneficial ownership passing to the surviving spouse/civil partner.
• For a cash APS, the time limit is three years from the date of death or 180 days from completion of the administration of the estate (if later than three years from date of death).

It is also the case that the usual HMRC residency requirements for making ISA subscriptions do not apply to the APS, although different ISA providers will have their own rules surrounding the acceptance of funds from non-UK individuals.

If you have any questions or need more information, feel free to contact our Technical Services team on 020 7608 5330 or e-mail technical_direct@integrafin.co.uk.

All information is based on our understanding and interpretation of applicable law and regulation.

 

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10. ISAs – Treatment Of Accounts Following Death
11. Interest On Cash
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