Cash and S&S ISAs when a spouse dies

BFM

My wife and I have been filling out our respective cash and S&S ISAs every year for the last few and plan on continuing to do so as an alternative to pension payments keeping our income away from the taxman.

When one of us passes away is it right that the surviving spouse would basically get a lump sum of whatever the ISAs were worth - but they would no longer be tax exempt?

I never really thought about this as I was just thinking to get as much money as possible into tax free wrappers as a point of principle.

I'm not really sure what to think about it and if we need to tweak our strategy - but just wanted to get confirmation before I gave it any more brain space.

thanks in advance

dzug1

They cease to be tax exempt, yes.

What actually happens varies - cashed in, transferred to a normal account or have the underlying investments transferred are all possible - and all depend on Probate to actually pay out so it might not be quick

BFM

so essentially at that point they become 'normal' savings. as it stands they could start to be paid back into wrappers at £12K ish per year or whatever it is then.


This still feels better than having annuities and one of us shuffles off their coil and there isn't a pot. I understand it will all come down to whether we live a long or short retirement. wouldn't it be easier if we knew that now?

BobQ

BFM wrote: »

so essentially at that point they become 'normal' savings. as it stands they could start to be paid back into wrappers at £12K ish per year or whatever it is then.

Yes

This of course assumes your spouse leaves the ISA money to you or you to her.

xylophone

as an alternative to pension payments

Do you mean that neither of you has a pension other than state pension?

How old are you and your wife?

Perelandra

One other thing to consider-

Basic rate taxpayers have no further income tax to pay on dividends received, so even if you do lose the tax wrapper on the ISA, any income from it may still not have tax implications (depending, of course, on your age and other incomes received).

If you are of retirement age, this will hold true until your annual income gets to about £25k.

(Capital gains would still be subject to CGT, but you'd be able to use a £10k allowance there).

redbuzzard

Perelandra wrote: »

If you are of retirement age, this will hold true until your annual income gets to about £25k.

What am I missing Perelandra? I must have overlooked some nuance here - the personal allowance for 13-14 is £9,440 and the basic rate tax band is £32,010 - making £41,450 of income before higher rate tax applies?

Not that I have paid any attention to this for years, any shares have been held in PEPs/ISAs.

pqrdef

BFM wrote: »

as it stands they could start to be paid back into wrappers at £12K ish per year or whatever it is then.

If you stop paying in new money when you retire, you can then start using the annual allowance to move money from one spouse to the other. Interesting little game of guessing who's going to snuff it first.

BFM

xylophone wrote: »

Do you mean that neither of you has a pension other than state pension?

How old are you and your wife?

we both have some bits and pieces from work and personal pensions but it won't be a great amount. I just prefer the flexibility of isas over pensions. I'm kicking myself for having not thrown more earnings into pensions when I was a 40% tax payer as that was a no-brainer. as a newly qualified teacher that won't be a concern for a while.

i'm 40 the wife a couple years younger. we cleared the mortgage and plan on both saving full isa allowances for the next 15-20 years.

BFM

Perelandra wrote: »

One other thing to consider-

Basic rate taxpayers have no further income tax to pay on dividends received, so even if you do lose the tax wrapper on the ISA, any income from it may still not have tax implications (depending, of course, on your age and other incomes received).

If you are of retirement age, this will hold true until your annual income gets to about £25k.

(Capital gains would still be subject to CGT, but you'd be able to use a £10k allowance there).

so if lets say I have a S&S ISA which is predominantly Income producing funds and then cark it - its possible to pass those funds on to my wife as funds and not cash so wouldn't be taxed the same as interest from a cash ISA would?

every answer leads to another question with this stuff....

BFM

BobQ wrote: »

Yes

This of course assumes your spouse leaves the ISA money to you or you to her.

valid point...