ISA Tax Loophole Plugged For Grieving Families

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The government is finally closing a costly tax loophole that opens when one of a married couple passes away.

Since April 2015, the surviving partner in a marriage or civil partnership has had the opportunity to pass on their ISA savings tax-free when they die.

But the tax break only applies to the value of the ISA and not any growth in the fund between the date of death and when the estate is finalised – which can take years in some cases.

For a saver with £1 million stashed in ISAs increasing at a rate of 5%, the growth can come to £150,000 over the three years it could take to sort out an estate – which could mean a tax bill running into thousands for some families.

The issue with the tax bill is the way ISA rules deal with inheriting accounts.

Rules are changing

Instead of inheriting the ISA, the partner has an additional permitted subscription.

The allowance allows transfer of the savings amount to the surviving partner without tax, but not the growth in fund after the transfer.

If the surviving partner uses their ISA allowances, any growth is held outside the tax wrapper and is liable to tax.

The good news is ISA rules are changing from April 6, 2018.

Instead of the subscription allowance, on the death of a saver, an ISA will switch to a continuing account and any growth in the amount will remain tax-free, which could be a significant tax saving for some families.

Financial headaches

The continuing account will stay open until the estate is finalised or three years after the death of the saver.

The transfer amount will be the highest of the value of any cash or investments inherited or the ISA value on the saver’s death.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Unfortunately, the administration of a complex estate can take months, or even years. During this time, the ISA investments may continue to grow.

“This causes two headaches. During the administration of the estate, growth in the ISA is exposed to tax and the assets may grow but the ISA wrapper isn’t, which means the surviving spouse may not be able to rewrap all of those assets in an ISA once the administration of the estate is complete.”

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