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ISA estate planning

4 March 2020

The number of age over 65 ISA millionaires may be small but it is growing. Joshua Croft, technical consultant at AJ Bell, considers the need for ISA estate planning in this and other age groups.

When looking at estate planning, pensions are often the primary wrapper considered where a tax efficient solutions is the primary aim. Rightly so as in most cases given funds can generally be passed on outside of the deceased’s estate with no liability for Inheritance Tax. A pension is also most likely to be a client’s largest form of savings.

However, with ISAs now in their twentieth year and with the hike to a substantial £20,000 allowance introduced from the 2017/18 tax year plus no cap on total savings, ISAs could start to catch up. The first saver to become an ISA millionaire was reportedly in 2003 and it’s likely that lots more shrewd investors have become ISA millionaires in the meantime.

According to the latest HMRC statistics the age group holding the most ISA funds are the over 65s, the same group where estate planning may be becoming more of a pressing issue. And while ISAs do not offer a choice of the method by which death benefits are paid in the same sense as pensions, ISA assets left to a spouse or civil partner are not subject to inheritance tax thanks to the spouse exemption.

Using the APS

ISAs also now offer the surviving spouse or civil partner the opportunity to increase their own tax efficient savings by making an additional permitted subscription (APS).

The APS allows the surviving spouse or civil partner to make a one-off additional subscription up to the value of the deceased’s ISA without it contributing towards the spouse’s normal ISA limits.

When an ISA investor dies, their account becomes a ‘continuing account’, and the tax advantages enjoyed by the original investor continue until the earlier of the account being closed, the administration of the estate being completed, or three years.

The surviving spouse has the option of using the value of the ISA either at the date of death, or the date when the ISA ceased to be a ‘continuing account’ when working out how much APS they can pay. The continuing account status allows for the ISA to continue growing tax free meaning the surviving spouse can use a higher value for the APS, although if the ISA falls in value then it may make more sense to use the value at the date of death.

If the surviving spouse uses the APS with the same ISA manager that held the deceased’s account and they inherit the investments held in the original ISA (becoming the legal beneficiary) they can choose to use those investments to pay the APS in-specie. This removes the need to disinvest a portfolio and re-subscribe in cash, reducing any transaction costs.

The surviving spouse does have the option of using the APS with another ISA manager. They may choose to do this because the deceased ISA manager doesn’t accept APS payments (which they are not obliged to do) or because they may have an existing account with another ISA manager. The APS can only be ‘transferred’ once, and it must be transferred in full.

Potential for APS use

It has been reported that the use of APS has not been that widespread since their introduction. There will be many cases where it will not be relevant, where the survivor is not using their own allowance and the deceased’s ISA value will be within it. But given the value of ISAs accumulated in the first twenty years since their inception and the fact that the older generations hold the majority of these funds, some could miss out on a potentially valuable increase to their own tax free savings.

As hinted at above, ISA managers have some discretion over how flexible they are in the application of the APS rules. With that in mind, whilst death benefits are unlikely to be the clincher when deciding where a client should be investing, when you’re considering a platform or ISA manager, an enquiry as to the policies of the manager could be time well spent.

Professional Paraplanner