Transferring an ISA after spouse's death

pratik

Hi,

I am posting today to ask for some advice that I've not been able to get much help with when dealing with HMRC regarding transferring an ISA after a death.

Some background...

My mother passed away from cancer on 31st October 2014, and at the time had a substantial set of savings locked into her ISA (tens of thousands of pounds, and some shares).

We have completed all the probate forms so that my mother's accounts and things transfer to my father, but are unclear as to what the situation is regarding transferring an ISA.

From the budget message, it seems that after death, an ISA can be transferred into the spouse's name when creating a new ISA (this tax year) with a 'special status' increasing the limit for one time only, hence maintaining its tax free 'wrapper'.

When I contacted HMRC by phone they never responded (despite 14 calls over the past week).

When I contacted them via Twitter, they said that yes, the ISA can be transferred to my father when subscribing to a new ISA this year and the limit for this year's contribution be raised to:

the value of my mum's ISA + this year's ISA allowance

But then I received a response from them via email saying that it would not be possible to transfer the ISA and maintain the tax free wrapper as the death occurred before 3rd December 2014.

That seems a shame - to lose all the benefits of a lifetime's worth of hard work and savings for just a 33 day difference between my mother's untimely death and the date HMRC have now quoted me.

I know this seems like a silly question, but I'd be very grateful if the MSE community can help me better understand the rules around this, and if there is any scope for exemptions.

Many thanks in advance for your assistance.

Kind regards,

PV

colsten

Afraid, the preservation of the ISA wrappers only applies to deaths of savers who died on or after 3 December 2014.

Your dad can obviously still inherit the contents of your mum's ISA without paying IHT on it but not in a tax-free wrapper.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/396827/Spousal_TIIN_cons_final.pdf

kidmugsy

pratik wrote: »

That seems a shame - to lose all the benefits of a lifetime's worth of hard work and savings for just a 33 day difference between my mother's untimely death and the date HMRC have now quoted me.

"to lose all the benefits": oh come off it.

EasySolution

colsten wrote: »

Afraid, the preservation of the ISA wrappers only applies to deaths of savers who died on or after 3 December 2014.

Your dad can obviously still inherit the contents of your mum's ISA without paying IHT on it but not in a tax-free wrapper.]

An ISA is Income Tax and Capital Gains Tax free. It is NOT Inheritance Tax free.

The point of this amendment is to allow the surviving spouse to retain the ISA status of the fund and aggregate it with their own ISA fund instead of being limited to the annual allowances.

CLAPTON

without knowing the actual sum involved and your father circumstance , how much difference will it make?

your father has a 15k isa allowance each year
and soon there will be a 1,000 tax free interest allowance too?

colsten

EasySolution wrote: »

An ISA is Income Tax and Capital Gains Tax free. It is NOT Inheritance Tax free.

When you die, any assets left to your spouse or registered civil partner, provided they’re UK-domiciled, are exempt from inheritance tax. "any assets" includes the savings/investments in any ISAs, and this has been the case for a long time.

The new rules are that the spouse or registered civil partner can now also inherit the tax-free status of the ISA savings/investments.

colsten

CLAPTON wrote: »

without knowing the actual sum involved and your father circumstance , how much difference will it make?

your father has a 15k isa allowance each year
and soon there will be a 1,000 tax free interest allowance too?

The most recent annual ISA allowance isn't really relevant as it is the entire ISA spouses and civil partners can now inherit under the new rules. Under the new rules his widow could now retain the ISA wrapper for the entire savings balance / investment portfolio but the father died before the new rules came into effect.

I would be interested as well in how much difference it makes (if it's not too nosey to ask).

bowlhead99

colsten wrote: »

I would be interested as well in how much difference it makes (if it's not too nosey to ask).

If it is 'tens of thousands of pounds and some shares', let's call it £50k. Let's firstly assume that the husband has his own satisfactory assets and income and now the wife is no longer on the scene and household expenses have fallen, he can afford 50k to be invested in an all-shares portfolio.

Let's then assume the 50k was invested in a shares portfolio producing 7% compound return from a combination of dividends and capital growth, almost doubling in value. So when the shares grow to be worth £98.5k from 50k over the next decade, he has 48.5k profits.

In a best case scenario, the husband is a basic rate taxpayer and pays zero tax on his dividends. He also has £11k capital gains allowance available every year which is way more than is needed to manage the gains on a £50k portfolio, so he pays zero tax on his capital gains.

So, the 'cost' of not having the ISA wrapper available, is £nil.

However, in a worst case scenario the husband is a high rate taxpayer and already uses his full capital gains allowance every year from his own assets.

So his returns are taxed at 25% on dividends and 28% on capital gains. The blended average tax rate between the two might be around 27%. If he pays 27% tax on his 7% return each year he only gets 5.11% net return. Compounding this for a decade is only a 65% total return instead of a 97% return. So the total pot is only £82.5k instead of £98.5k and after a decade he has effectively 'lost' £16k because of tax which wouldn't have been an issue if he'd had the ISA wrapper available. That £16k of future value lost a decade from now, recognising inflation, is probably something like £11k lost in real terms.

Alternatively perhaps the man isn't so lucky and such a risk-taker that he can afford to keep a £50k portfolio of shares, now his wife is no longer around bringing in an income and sharing the bills. So he just has the 50k in a cash ISA. Assuming over the next 10 years it generates 2% a year compound, he turns the £50k into almost £61k as a high rate taxpayer. Whereas paying tax he would be getting net 1.2% or 1.6% so worst case scenario it would only compound to £56k. So again, a loss of value by year 10, and the 5k shortfall might be £3k in real terms.

Of course, if the man is smart he might be able to find non-ISA savings accounts paying better than the cash ISA returns (e.g. pensioner bonds, high interest current accounts etc) so the keeping of the ISA wrapper might actually hinder his returns and his loss of value going unwrapped is £nil.

Or perhaps he doesn't have any savings income himself (because his own income is from investments or pensions) and so the 2% return on £50k a year falls neatly into the new 'no savings tax on the first £1k of savings income for basic taxpayers' rule. Or his total income including the savings interest is below £15k so he keeps savings income entirely disregarded and tax free even without an ISA wrapper. So again the loss of value going unwrapped is £nil.

Consequently it is very difficult to say without 10 years of foresight, what will be the true 'loss' over the next decade from not having an ISA wrapper available. It could be £nil in a variety of situations, it could be £3k in real terms, it could be £11k in real terms.

However, while it might be interesting to look at 'what if' the rules had been implemented earlier, it is not something that happened. The rules did not come in earlier and you have to draw a line somewhere. What if she had died 20 years earlier, should we revisit and keep stretching the rules back to give a break based on current laws?

There are all sorts of rules that come in over time, from time to time, which apply prospectively and not retrospectively. Generally for tax planning it is better to have rules only apply going forward, with some notice, otherwise someone will be up in arms because rule changes are not always in their favour and you never want a tax rule to stretch back in time and catch you if you were not caught before. In this particular instance the rule change is favourable so you would like it to stretch back but it doesn't, tough. No exemptions. Spouse ISA transfer is something that never applied before, it is not like it's a rule that applied and you had to do something to qualify. So there is no way to qualify.

If the government allows you to grow your assets by an extra "£nil to £11k" by applying a rule change that doesn't actually apply to you, I would like them to do that for me too, in some other area of tax, but they won't. So if they 'let you off' then I pay for it. No thanks