Inheritance Additional ISA Subscription

SeniorSam

With the Autumn anouncement that the first to die of married couples or civil partners living together can pass on their complete ISA holdings to the survivor to hold as ISA's, have any thoughts gone into the costs involved.

The initial arrangements were that this could be done, but would require encashment and re-investment by the survivor with the same ISA Managers. However, this would mean a second amount of charges being made on an investment that initially had charges made on it.

This new arrangement will come in on the 5th April 2015, but has any further thought been considered on this to make it an 'in-species' transfer to the surviving spouse, possibly at a nominal admin fee?

Sam

kidmugsy

SeniorSam wrote: »

has any further thought been considered on this to make it an 'in-species' transfer to the surviving spouse, possibly at a nominal admin fee?

My understanding is that this was announced the government's intention some time after the Autumn Statement. Googling should find you the current state of play.

SeniorSam

Tried that but nothing new has come up yet. Maybe it's another playing card in the political arena?

Sam

Archi_Bald

In-specie transfers are supposed to be possible. There is plenty of evidence for this on the web, e.g.:

http://citywire.co.uk/money/inheriting-isas-investments-will-not-have-to-be-sold-and-reinvested/a788143

http://www.jameshay.co.uk/DocumentView.aspx?DocumentID=3049

ISA providers have been able to do in-specie transfers forever - the only added element is that they now need to also be able to transfer from person A to person B (as long as they have satisfied themselves that person B is the legal partner of deceased person A, and that there is no will in which person A is passing the proceeds of the ISA to another heir).

bowlhead99

It is a nice idea but not workable without more expense and practical difficulties.

I think people got excited by the chancellor's announcement that: "At the moment, when someone dies, the savings in their ISA lose their tax-free status and their spouse starts paying tax on that money. From today, I can announce that when someone dies, their husband or wife will be able to inherit their ISA and keep its tax free status"

Politicians sometimes put their own spin on things and/or misunderstand raw legislation that gives the fine print, even if they are responsible for setting the broad tone of that legislation.

The practical reality per the treasury statement is that what can be inherited is 'ISA benefits'. The gov UK website that was updated to summarise the autumn statement said

From 3 December 2014, if an ISA holder dies, they will be able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance which they will be able to use from 6 April 2015.

The surviving spouse or civil partner will be allowed to invest as much into their own ISA as their spouse used to have, in addition to their normal annual ISA limit.

Effectively if you hold shares in an ISA (or SIPP for that matter) you are not really holding shares, you have beneficial ownership - via your ISA T&Cs - of a nominee account that holds shares.

The ISA nominee is the one registered on the company's books as the shareholder. So, when someone dies this is unwound and the ISA nominee disposes of the assets that it no longer has a contract with the dead person to hold, and returns cash to the estate. Potentially, they might be able to return actual underlying assets to the estate but I don't think so because there is no mechanism to allow ISA wrappers to be dissolved and someone take underlying assets out of an ISA wrapper.

If - once probate has been done and any inheritance tax settled - a you as a spouse inherit the estate, you you are granted a nice big additional ISA allowance on top of your usual 15k for the year, with which you can invest the resulting proceeds. HMRC will be told the amount of allowance you inherited and they will temporarily increase that ISA limit and monitor to make sure you don't make contributions over your limit, in the usual way that they monitor people's contributions over their limit.

IMHO that seems a practical and efficient way of tweaking the legislation to allow people to preserve the tax benefits of ISAs and is an effective way of bringing the change in relatively quickly and cheaply.

The assets might not even be able to be passed over completely because of taxes to pay anyway from other people sharing the inheritance. So doing it all via cash is a cheap and clean way of doing it.

The providers are not set up to receive in-specie transfers of assets from someone else's name. There was no provision in the ISA rules to require them to take any kind of in-specie contributions except for the very special case where you have shares in one company from a maturing sharesave scheme; that is a bit of a labour intensive process and does not have large volumes of multiple asset types (UK shares, international shares, OEICs etc) that might want to be moved in from a deceased person's ISA. Some providers seem to have gone ahead and prepared for it but only for internal transfers of assets already on their own platform so perhaps this has now changed.

At the moment I think it generally has to be done as cash anyway because if the spouse died last month the ISA wrapper doesn't become available until the new tax year starts in April. I guess going forward the timing would allow it to all happen in a shorter timeframe but don't think there is a provision in the rules to allow it to work any other way than putting money in through the front door of your own ISA and count it against your (increased) limit for subscriptions during the year.

To allow it the other way (and have Husband Fund Manager 1 send a pile of assets to Wife Fund Manager 2) might be nicer for that subset of clients whose personal circumstances allowed them to maintain the full set of assets held by the deceased, but would require the industry to set themselves up for receiving these transfers which would have a non-zero cost impact and ongoing costs at the time the managers processed them.

However, this would mean a second amount of charges being made on an investment that initially had charges made on it.

You mention a 'second amount of charges'; we have moved past the era of high commissions and initial charges being levied on investment funds for example, so any charges are now either explicit for advice from an adviser or for a broker/platform's admin processing.

If there is no advice taken there won't be any new charges there, but it is undeniable that there will be transaction costs for the incremental workload of the ISA manager processing the new fund subscription or stock market purchase. If they instead processed a transfer in of assets and assigned them to their customer (together with dealing with HMRC and probate paperwork etc), that is still incremental workload and so the costs would not come down significantly for the customer unless the broker/platform swallowed them as a marketing play out of their desire to retain the business.

So bottom line I don't see the industry changing to accommodate this -at least across multiple providers rather than within the same manager - because it is probably more trouble than it is worth for the legislators to change the existing rule sets and industry to adapt for the few tens of thousands of cases a year. Some platform groups might like it if they could set up for it relatively easily and it helped them retain the business for the inheritee rather than have the assets sold for cash that they never saw. Other groups might not like it - if it was expensive to set up for, they had to throw the work in for free because of larger competitors doing the same, and it didn't result in much incremental business won/retained.

In some ways forcing you to go to cash while the estate is settled is good for moneysavingexperts because it focuses the mind and gives them a chance to take stock of the new financial situation in the household, construct a new financial plan, and select the most appropriate products and providers to re-buy any combination of cash isas, S&S isas, pensions and other solutions that might be appropriate.

The downside is that if you did want to keep 100% of the previous ISA contents you are out of the market for a short period before you get back in again. But in the context of a free tax wrapper on tens of thousands of pounds of assets that you would never have been allowed before, it is not too much of a bitter pill to swallow.

SeniorSam

Thank you so much for an excellent reply which gives more clarity for many.

Prior to posting, I did a little research and disd notice one small part that differs slightly that was published by Ideal Financial Management Ltd as follows ......

How the rules will work
From now on, if an ISA holder dies, their spouse or civil partner will be allowed to invest an amount equivalent to the deceased's ISA into their own ISA via an additional allowance. This is in addition to their normal annual ISA limit for the tax year and will be claimable from 6 April 2015. This means the surviving spouse can continue to enjoy tax free investment returns on savings equal to the deceased ISA fund.

But it doesn't have to be the same assets which came from the deceased's ISA which are paid into their spouses new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any assets.

..... If that is correct, then the actual ISA's of the first to die could be distributed in any way, but the spouse would retain the right to invest the same amount that those ISA's were, into her own ISA account.

With a month to go before this is actually available, it could be that more information will be forthcoming soon and possibly some additional changes on how this can be done.

Many thanks once again

Sam

bowlhead99

SeniorSam wrote: »

But it doesn't have to be the same assets which came from the deceased's ISA which are paid into their spouses new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any assets.

..... If that is correct, then the actual ISA's of the first to die could be distributed in any way, but the spouse would retain the right to invest the same amount that those ISA's were, into her own ISA account.

This is true, it shouldn't have to be the same assets. The point is that from what we've been told, you are allowed the same value in your wrapper. So for example if when you were a couple, the husband has £20,000 shares in ABC plc at the time of his demise, but now the husband is gone and the wife wants £20,000 of 3-year Cash ISA ; or £10,000 of shares in DEFplc and £10,000 units of The XYZ Fund; she should be able to do that. She just uses the cash proceeds to buy what she wants and he has a £20,000 subscription limit with his ex-provider over and above her regular £15,000 limit, to do with what she likes. At least, so far as we've been told

If the proceeds of the ISA are distributed to the son (who is not allowed to inherit an ISA allowance) the son can go and buy £20,000 of ABC plc shares (of which £15,000 could be wrapped in an ISA if he had not already used his allowance) or buy a £20,000 car or whatever, but he is not going to get the £20,000 ISA wrapper. That ISA wrapper will just go to the spouse as a one off extra allowance.

So, the son could inherit the proceeds of the ISA, the wife could inherit the proceeds of a house sale, and the wife could use some of the house money to make £35,000 of ISA contributions (her own allowance if unused for that year, plus the £20,000 extra allowance) to the husband's old ISA platform who are the ones that know she is entitled to have that 'extra allowance' passed to her. Quite a flexible system really, if it works the same in practice as the earlier media commentary is implying.

The thing about in specie transfers is that they only really work where you have a husband and wife with one provider and it can be dealt with internally. If husband dies and wife has an ISA with the same manager and wife wants to put the exact same assets into her ISA... then the manager who controls the ISA nominee for both of them can just move the assets over. If she didn't have an account with the same manager, she could get one, and make the subscription via an internal 'just move the assets over' just like the above.

However if husband had assets at (e.g.) Hargreaves Lansdown while the wife uses (e.g.) Youinvest, then it is not at all practical for Youinvest to have to deal with her account being funded by an in specie transfer of assets that were previously in someone else's name over at H-L. It is just a load of admin hassle.

So the only way it will work is if H-L do an in specie transfer from hubby's account at H-L to a new account for wifey at H-L, utilising her inherited subscription limit, and then wifey does the normal (probably painfully slow) in specie transfer from her new H-L account to her Youinvest account. Alternatively, given we know that in specie transfers are a hassle and can cost money to administer, wifey might be better to have H-L simply cash in his chips and give her a new ISA filled with cash at H-L which she then transfer over to Youinvest quickly and easily, or to a bank as a Cash ISA for that matter.

SeniorSam

Thanks again

Sam

grey_gym_sock

bowlhead99 wrote: »

The ISA nominee is the one registered on the company's books as the shareholder. So, when someone dies this is unwound and the ISA nominee disposes of the assets that it no longer has a contract with the dead person to hold, and returns cash to the estate. Potentially, they might be able to return actual underlying assets to the estate but I don't think so because there is no mechanism to allow ISA wrappers to be dissolved and someone take underlying assets out of an ISA wrapper.

i think it is possible to take the underlying assets out of an ISA wrapper. for instance, for shares held in an S&S ISA, by asking the ISA provider to convert the shareholding into a certificated holding in your own name. i haven't tried this with an ISA, but did it with a PEP (and S&S ISAs are basically a rebranding of PEPs). (of course, this way of doing it loses the tax-exempt status of the shareholding.)

when you die, an S&S ISA, which is a special (tax-exempt) kind of nominee account, presumably just becomes an ordinary nominee account. in general, there is nothing to prevent your transferring assets out of nominee accounts, either into your own name (e.g. with a share certificate), or into another nominee account. though there are usually charges to do this, and it may take a long time if it involves 2 different brokers (as most ppl who've made S&S ISA transfers in specie will testify).

i'd agree that a transfer between nominee accounts which involves changing both the broker and the beneficial owner simultaneously might be pushing your luck.