On death, ISAs form part of your estate (although some ISAs holding shares may qualify for up to 100% Business Property Relief). If being transferred to your spouse, the biggest issue was always not this but that ISAs automatically lost their tax efficiency on death. There was no way for the ISA funds to retain their income tax and capital gains tax advantages into the future and if the surviving spouse wanted to keep these savings in an ISA this was only possible by gradually placing them in their own ISA each year within the normal ISA subscription limit.

From 6th April 2015 Additional Permitted Subscriptions (APS), on top of the normal ISA subscription limit, became available to the surviving spouse or civil partner, where death occurred on or after 3rd December 2014. The deceased and the surviving spouse must have been living together at the date of death (i.e. not separated under a court order, under a deed of separation, or in circumstances where the marriage or civil partnership has broken down).

Although from the date of death, any ISA investment still loses its ISA status, the APS allows a surviving spouse to put the same amount of money back into ISA to effectively regain the tax benefits. This allowance is available for 3 years from the date of death or 180 days from the estate administration being completed, if later, for investment of cash. If the investment is to be made by transferring the existing ISA investments “in specie” then this has to be done within 180 days of the surviving spouse become the “owner” of these investments.

Importantly, this isn’t the same as just allowing the ISA funds to transfer across to the surviving spouse in an ISA, which means that it is possible for the surviving spouse to make use of the APS immediately if they have sufficient money available, without having to wait for probate or the transfer to them of the existing ISA investments.

The APS has to be used with only one investment manager however, it can be used for any combination of cash or stocks and shares ISAs, with either the existing investment manager or a new investment manager and once used, the ISAs can be transferred as normal. So this is not so much a restriction as a measure to simplify the administration of the process.

It could be argued that with the changes coming in from April 2016, with the £5,000 tax free dividend allowance, Personal Savings Allowance for interest (£1,000 or £500), the existing availability of the annual CGT allowance and, for some, the £5,000 tax free starting rate band for savings income, there will be an increasing number of people who can access the same tax advantages as an ISA with an investment outside an ISA wrapper. However, many people have built up significant investments inside ISAs and earlier PEPs and the ability to retain these in their tax advantaged wrapper will remain very important for longer term income planning in particular. In addition, we all know how easily tax allowances can change however, the principle of no retrospective changes means that it is highly unlikely that the key tax status of the ISA will change.

Although from an Inheritance Tax perspective ISAs remain in your estate, having the ability to minimise tax on investments and therefore maximise their value in supporting expenditure in retirement should make it easier to consider effective Inheritance Tax planning with other assets instead.

If you would like to discuss the changes to ISAs with a professional, please email Ed.Gibson at Ed.Gibson@shawgibbs.com or call 01865 292200.