ISAs on death: How good are the changes?

The Chancellor’s Autumn statement brought about a significant change to Individual Savings Accounts (ISAs) on death. But how could the changes benefit you and are there any shortcomings?

ISAs are accounts or investments with special tax treatments and many of us have them. You are limited as to how much you can invest in any one year (£15,240 from April 2015), but whatever is invested is completely tax-free. So if you invest in the stock market and sell your ISA-wrapped shares at a gain, there will be no capital gains tax. Likewise, dividends and interest will be paid gross with no liability to income tax.

ISA benefits are personal to an individual and cannot be transferred. But from 6 April 2015 there is an important change to how they work in the event of death. It will now be possible on death for a person’s ISA investments to be transferred to their spouse or civil partner and the survivor can continue to benefit from the ISA protection. Previously it was the case that ISA benefits disappeared on death and if such assets were capable of transfer to a new owner then they lost their privileged status.

This is good news especially if a widow, widower or surviving civil partner has their own ISA investment pot as it will be enlarged by what they inherit from the deceased. But there are some limitations. Unfortunately the new rules only benefit the surviving spouse or civil partner of a deceased person – it cannot be passed to others such as children. Some have also misinterpreted the new rule as meaning the annual ISA investment limit can be transferred to the survivor (meaning a doubling of how much can be invested tax-free), but that is not the case. It is the accumulated pot of investments that are capable of transfer with the ISA protection.