ISA query!

MummyYummy

Hello all,

I'm hoping some of you can give me some advice for my grandparents. They both have an ISA each and are going to use the contents of both accounts to cover their funeral expenses (not a nice thought, but they like to know they have provided for this).

Recently a friend of a friend's husband died and I've heard they have had to pay tax on his ISA when his wife inherited the money.

Is this right? My grandparents really have no knowledge of bank/saving accounts etc - they simply have a basic account and the ISA's. I would hate for them to end up being taxed on the money they have put away to take care of funeral expenses - they wouldn't want that either.

Thanks in advance.

Lokolo

ISAs lose their tax free benefits when the owner dies, and then become regular savings.

You don't get taxed on the money itself, only the interest.

So whilst the money is in an ISA and the person lives, tax free interest.
When they die, the interest then becomes taxable.

MummyYummy

Thank you for clearing that up for me.

Would it still be advisable for them to keep the ISA's? I'm assuming any other savings account would also tax on interest.

Lokolo

ISAs are good for tax payers. If they are tax payers then may as well keep it in the ISAs.

Otherwise savings are fine and can get tax free interest by filling in an R85 form.

http://www.hmrc.gov.uk/forms/r85.pdf

Baldur

Lokolo wrote: »

ISAs are good for tax payers. If they are tax payers then may as well keep it in the ISAs.

Otherwise savings are fine and can get tax free interest by filling in an R85 form.

http://www.hmrc.gov.uk/forms/r85.pdf

Note that Cash ISAs, like taxable savings accounts frequently only offer a decent interest rate for the first year after opening, after which the interest paid can plummet like a stone.

If they have had these ISAs with the same provider for a number of years, they may be earning very little interest, so it would be wise to check and, if necessary, transfer them to a provider/account that offers better interest.

It's as simple as selecting a provider that accepts ISA transfers and completing their ISA transfer form - the new provider must arrange the transfer, in order to retain the tax-free status of the funds.

MummyYummy

Yes they have had them quite a while - over 5 years at least. They seem quite reluctant to change providers - set in their ways .

Thanks everyone for your advice.

kidmugsy

Lokolo wrote: »

ISAs lose their tax free benefits when the owner dies, and then become regular savings.

You don't get taxed on the money itself, only the interest.

So whilst the money is in an ISA and the person lives, tax free interest.
When they die, the interest then becomes taxable.

More precisely, only the further (i.e. after death) interest is taxable.