Individual Savings Accounts (ISAs) have been a popular choice for UK savers for over two decades, with approximately 1 in 5 adults owning one at any one time, mainly because these accounts offer several tax advantages that can help to boost the value of investments.
Recently, the rules concerning ISA taxation after an investor dies have been revised so that the tax benefits apply during the administration of the deceased’s estate. However, it’s important to consider the rules in their entirety to ensure the full tax implications are understood.
ISAs: Are They Free From Inheritance Tax?
Not necessarily. The rules dictating whether an ISA is subject to inheritance tax (IHT) depends on what happens to it after the investor passes away.
Whereas previously ISAs were automatically subject to IHT, this now applies only to deaths that occurred before 6th April 2018.
If, on death, an ISA is given to a spouse or civil partner, it will not be subject to inheritance tax because of the spouse exemption. Under inheritance tax laws, the entirety of the deceased’s estate, including tax-free savings, are exempt from IHT; there is no limit to the value of the estate.
However, if an ISA is passed to another beneficiary – that is, not a spouse or civil partner – or it is left as part of the estate to non-exempt IHT beneficiaries, it will potentially be liable to inheritance tax. This will be calculated based on the ISA’s value on the day of the holder’s death.
Cash ISAs v Stocks And Shares ISAs
An ISA holder can enjoy tax-free savings during their life irrespective of whether their account is a cash ISA or a stocks and savings ISA (subject to the upper limit imposed on these accounts). Cash ISAs are exempt from income tax, while stocks and shares ISAs are exempt from dividend tax. In both situations, the value of the interest accrued, or the share dividends, has no bearing on the tax-exempt status.
If a stocks and shares ISA is sold, then it is also exempt from capital gains tax.
Before April 2018, the tax-free status would be lost at the point of death of the account holder, so any income received during the administration of the estate would be liable to taxation. It is this rule that was amended so the investor’s tax-free status can be enjoyed while the estate is administered.
Is There A Time Limit Applicable?
The investor’s tax-free status continues to apply until the administration of their estate has been completed, the ISA is closed, or three years have passed since the death of the holder – whichever occurs first.
Consult A Specialist At David Howard
While the rules concerning the tax status of ISAs have been simplified, the administration of an estate after an ISA holder’s death can be a complex process.
For more advice on inheritance tax, or to review your personal tax and wealth plans, get in touch with one of the specialists at David Howard, who will be delighted to offer expert, professional guidance.
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