ISAs – not so boring after all!
It is fair to say that most people have an ISA. Why wouldn't you? It's a straight forward, usually low risk way of investing your money. ISAs are a good first step to saving as they are simple to manage and have tax benefits. I remember my grandmother made me set one up when I went to University – it was actually a wise decision as interest rates were 4% which is generous by today's standards.
In this blog, I hope to dispel some ISA myths and provide a useful overview. With the end of the tax year approaching you may wish to invest now (if you haven't already done so) or consider where to put your money in the new tax year.
ISAs are tax free and will not form part of my estate on death – myth!
The assets you own at your death (sole and joint including your ISA) are taken into account for Inheritance Tax purposes.
I can open an ISA account on someone else's behalf – myth!
An ISA is personal to you so you can't hold it for someone else – on trust or otherwise.
ISAs only have tax benefits during lifetime – myth!
Whilst ISAs are a useful lifetime tax tool, they also have tax benefits on death. There are two particular points here which I want to highlight.
1. Transfer to surviving spouse or civil partner on death
In the past an ISA lost its tax free status automatically upon the account holder's death. The effect of this being that a surviving spouse or civil partner would have to pay tax on any income earned if they inherited it. Many faced unexpected tax liabilities which prompted a change in the tax treatment.
The current position, known as the "ISA wrapper" means the tax free status is still effectively lost on death, BUT can be revived by the survivor's additional permitted subscription allowance (APS). This is effectively a one off ISA allowance equivalent to the value of the ISA at the date of death. This won't be counted against the ISA annual allowance and is added to the survivor's own ISA annual limit. Where there are multiple ISAs held with different providers, the survivor receives the APS allowance for each ISA.
In essence, the survivor is entitled to an additional allowance which covers the value of the deceased's ISA savings as well as the survivor's own ISA savings. For example, if your spouse or civil partner held £100,000 in ISA savings, your ISA allowance would be £120,000, being the value of your spouse's savings and your own ISA annual allowance of £20,000.
Here is a quick overview of the rules.
- You are eligible where a spouse/civil partner died on or after 3 December 2014 and the APS could have been claimed since the start of the 2015/16 tax year
- There is no maximum ISA limit, so no matter how much is saved in their ISA, you will have that amount as an additional allowance
- APS allowances apply to all ISA products – cash, stocks and shares and innovative finance. You should always check with the ISA provider first about their requirements
- The APS is flexible. Survivors can keep each APS allowance with the existing ISA provider, OR they can transfer the whole of the APS to a different ISA.
- APS must be used within three years after the date of death
2. Stocks and Shares investments
Whilst cash ISAs are simple to manage, many people have taken up the stocks and shares ISA to manage their money. This gives your cash the chance to grow and earn more than it would in the cash ISA. Conversely, it could also go down as it is linked to the stock market so consider this carefully when you are investing. Any gains you make on the investments are free of income tax as they fall under the ISA tax umbrella.
Any profit (or gain) you make when selling investments in your ISA is free of Capital Gains Tax. It is worth noting that any losses made on your investments can’t be used to offset capital gains on your other investments. Dividends received on shares within an ISA are tax free and won't impact your annual dividend allowance (£5,000 falling to £2,000 in April 2018).
One of the main benefits is that you can diversify what is held in your stocks and shares ISA. For example, you have the flexibility to invest in most stocks and shares and can subscribe to OEICs, unit trusts and AIM shares. AIM shares are considered to carry more risk than blue chip shares, but it is worth highlighting that many AIM companies qualify for Business Property Relief (BPR). Shares that qualify for BPR are free from IHT on death provided they have been owned for at least 2 years at the time of death. This gives an advantage for people who have AIM shares in their portfolio as they can be left effectively IHT free to their beneficiaries.
Summary of benefits:-
- Easy to manage
- Advice available from planners and services vary from self-managed up to fully managed portfolios
- Diversity of investments
- Income tax and CGT efficient
- IHT efficient with AIM shares
Finally and as a reminder, the current Bank of England interest rate is 0.50% and the annual ISA allowance is £20,000 for 2018/19.
For queries and advice about IHT planning, please contact Alix Langrognat in the London Succession & Tax team.