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Jan. 21, 2015

Finance Bill 2015 – transfer of ISA allowance to surviving spouse

On 20 January 2015, HMRC published the draft Individual Savings Account (Amendment) Regulations 2015 to implement changes to the rules governing ISAs. The draft regulations provide that the surviving spouse or civil partner of an ISA account holder who dies on or after 3 December 2014 can subscribe to increase their own ISA allowance for the tax year in which the death occurred by an amount equal to the value, at the date of death (or for stocks and shares ISAs the value at the date of the surviving spouse’s subscription) of the deceased’s cash or stocks and shares ISA account or the aggregate value of his cash and stocks and shares ISA accounts if he had more than one account. The subscription for an increased allowance only relates to cash ISAs and stocks and shares ISAs. The new provisions will not apply to Junior ISAs and life insurance ISAs.


This is a big change to the current ISA rules that apply to individual savings accounts (ISAs) are set out in the Individual Savings Account Regulations 1998 (as amended).

On the death of an ISA account holder:

  • The ISA account terminates.
  • The tax free status of the investment ends so that post-death income and gains from the investment must be taxed.
  • There is no loss of exemption on interest or dividends payable or gains which arise on disposals made before the date or death.
  • The account manager must transfer the invested funds to one of:
    • The deceased account holder’s personal representatives
    • The beneficiaries of his will
    • Or under the intestacy rules
  • A spouse or any other person inheriting non-cash assets from a deceased ISA account holder cannot transfer them into their own ISA

The ISA allowance is set to increase. Each individual ISA account holder can invest up to £15,000 (excluding Junior ISAs) in a tax year in cash and non-cash ISAs. The allowance for 2015-16 will be increased to £15,420. The allowance cannot be transferred between individuals or shared.


Draft regulations published

transfer-ISA-allowance-to-surviving-spouse

On 20 January 2015, HMRC published the draft Individual Savings Account (Amendment) Regulations 2015 (the regulations) to implement changes to the rules governing ISAs originally announced in the 2014 Autumn Statement on 3 December 2014 and confirmed when the draft Finance Bill 2015 was published on 10 December 2014.

The published regulations show that the surviving spouse or civil partner of an ISA account holder who passes on or after 3 December 2014 can apply to increase their own ISA allowance for that tax year by the amount equal to the value, at the date of death, of the deceased’s cash or stocks and shares ISA account or the combined value of his cash and stocks and shares ISA accounts if he had several accounts.

If an ISA holder passes between the dates of 3 December 2014 and 6 April 2015 their surviving spouse or civil partner will not be able to subscribe for an additional allowance. The additional allowance will apply to the 2015-16 tax year over and above the surviving spouse’s own subscriptions (within the limit of £15,420).


Requirements

Before the surviving spouse or civil partner can increase their allowance in these circumstances. The following requirements must be met:

  • They must already hold an ISA account.
  • Their account must be managed by the same account manager as the deceased’s account unless HMRC authorises another account manager to accept the spouse’s subscription.
  • They must have been living with the deceased account holder at the date of death. The definition of “living together” is take from section 1011 of the Income Tax Act 2007 which treats married couples and registered civil partners as living together unless:
    • They are separated by a court order;
    • The have entered into a deed of separation; or
    • as a matter of fact they are separated in circumstances where the separation is likely to be permanent.
  • They must subscribe for the increased allowance for their ISA account within prescribed time limits.
  • The UK residence requirement for ISA account holders must be met

If the deceased had a stocks and shares ISA, extra conditions apply before the spouse or civil partner can subscribe for the increased allowance. These requirements are:

  • The surviving spouse or civil partner must inherit the stocks and shares in the ISA. Inherit is not defined. This may cause difficulties if the deceased ISA account holder dies intestate with surviving issue because the surviving spouse’s entitlement is to a statutory legacy and half of the remainder of the estate rather than specific assets.
  • Immediately before the surviving spouse subscribes to increase his ISA allowance by the value of the stocks and shares ISA, title to the stocks and shares is vested (and has been continuously vested since the date of death) in the account manager or his nominee.

Time limits

For the extra allowance, the spouse or civil partner must subscribe within the time limit set by the Regulations. The time limit varies depending on whether the subscription relates to a cash ISA or a stocks and shares ISA.

For a Cash ISA the subscription must be made within three years of the deceased’s death or 180 days after the completion of probate (estate administration) of the deceased’s estate. HMRC are yet to make clear what would determine that the administration is complete. If the deceased ISA holder passes on or after 3 December 2014 but before 5 April 2015, the deceased would be deemed to have died on the 6 April 2015.

For a stocks and shares ISA the subscription must be made within 180 days after the deceased’s personal representatives have distributed the stocks and shares.