How to make sure your husband or wife can inherit your Isa

The tax benefits of an Isa are widely known. That is, that when placed inside an Isa wrapper your money can grow free of tax – income tax, capital gains and dividend tax. 

What many people don’t realise is that Isa tax breaks keep on giving after you’re gone, as a spouse or civil partner can receive a one-off Isa allowance equal to the total value of your Isas when you die.

The technical term is the “additional permitted subscription” (APS), though some call it the inherited Isa allowance. It simply means that Isa savings and investments can be passed on and retain their all-important tax-free status. 

Crucially, the APS gives an additional allowance, so the surviving partner’s ability to save won’t be affected, allowing more tax-efficient savings to be made.

Here, Telegraph Money explains how the APS works, and how bereaved spouses can make the most of their partner’s hard-earned tax-free savings.

How do the Isa inheritance rules work?

Let’s say you have £100,000 in your Isas. When you die, your husband, wife or civil partner will get a one-off £100,000 Isa allowance, in addition to his or her £20,000 allowance, so they can inherit your savings without losing their tax-free status.

Growth in the value of your Isas after your death will also form part of the APS.

These rules on the APS have been in place since April 2015. Previously, Isa savings could be passed on to beneficiaries named in a will or through the laws of intestacy if you die without a will, but heirs automatically lost the tax-efficient wrapper.

What many people don’t realise is that the all-important additional Isa allowance can be used by a spouse or civil partner, regardless of whether an Isa is left to them or not. 

This means that even if you decide to leave the money in your Isas to someone else in your will, your spouse is still entitled to the extra allowance to the value of the assets held in your Isas.

“So, if the Isa assets are not inherited by the spouse or civil partner, that person can still apply for an increased allowance and contribute from his or her own assets,” said Nicholas Nesbitt, partner in financial planning at Mazars.

As an example, if you left £150,000-worth of Isa assets to your child, your spouse would still be entitled to an increased Isa allowance of £150,000, although they would use an alternative source of cash to fund it if they wanted to pay that much into an Isa.

You can only use the APS for a limited time

In order to get this additional Isa allowance after the death of a spouse or civil partner, a claim has to be made within a certain timeframe. 

The APS must be used within three years of the date of death, or within 180 days of the completion of the administration of the estate, whichever is later.

However, if you wanted to keep the same investments and simply move them to an existing Isa (known as moving them “in specie”), this needs to be done 180 days from the date the estate administrator declares that the investments are in the new name to do so.

Mr Nesbitt said: “Timing is the essential hoop to jump through. As difficult a time as it may be, moving quickly is crucial.”

He added that it’s only possible to do an ‘in specie’ transfer with the provider that held the investments, meaning the person inheriting the Isa will need to open a new one unless they already have an account with the same provider as their spouse.

APS rules can be used for cash Isas, stocks and shares Isas, and innovative finance Isas and can also be made on a lifetime Isa if the investor is a UK resident. The APS doesn’t apply to Junior Isas, however.

If the person who passed away held more than one Isa with different providers, there will be a separate APS allowance for each one. If they had a few Isas in the same place, the provider will only issue one APS, but which covers the balance of all of those Isas.

What to do with inherited Isa savings

While the surviving partner can choose where to keep the inherited savings, some providers give more options than others. In theory, they can leave the money with the same provider their spouse had saved it, or move it to their own Isa provider. Alternatively, they can open up a new cash Isa or stocks and shares Isa and place the additional subscription there.

It doesn’t have to mirror the type of Isa that the deceased held either. If the original Isa was a cash version, the APS could be used to fund a stocks and shares Isa for the survivor.

The big sticking point is that not all Isa providers accept APS payments.

According to Moneyfacts, just 21pc (106 of the 515) of fixed and variable-rate cash Isas on the market accept transfers from cash APS Isas, and only 65 options accept transfers in from stocks and shares APS Isas. 

As a total, 409 options out of 515 do not accept either of those transfers in, which means there are far fewer choices for those with inherited Isas.

Where Isa providers use their own branding on stocks and shares Isas run by other financial institutions, it might not be possible to use an APS with that brand. 

Nationwide is one example. Inheriting cash Isa balances is fairly straightforward, but if your spouse had a stocks and shares Isa with Nationwide it would need to be transferred to a different provider. 

That’s because Nationwide’s stocks and shares Isas are held and managed by a different provider – currently Legal & General. 

Other providers will only allow APS accounts to be opened if the deceased had an account with them. Mr Nesbitt added: “Some homework will need to be done on where an APS can be used.”

APS rules at a glance

APS rules can be tricky, but if you or someone you know is in a position to inherit a spouse’s tax-free savings, here are some key points to remember:

The APS rule is only applicable to a spouse or civil partner. Your children cannot inherit the tax-free wrapper sheltering your Isa money, nor can unmarried partners and other family members. Should you leave money in an Isa to another loved one, the money will form part of your estate, and it may be liable for inheritance tax.

While non-UK residents are generally not permitted to subscribe to an Isa, a non-UK resident can still apply for and use the APS.

You can only transfer an APS balance once, and only if no APS payments have been made under the allowance. 

You’ll need to fill out a form to complete an APS transfer, so make sure you have details such as the date of your marriage/civil partnership, your spouse’s date of birth and death, your address, and both yours and their National Insurance numbers.