How you can inherit your spouse’s ISA tax-efficiently, and why working with a financial planner can help

During your career or retirement, you may not give much thought to how you or your spouse or civil partner will manage your wealth when one of you passes away.

Unfortunately, this is an outcome that it would be sensible to discuss, as it’s sadly inevitable that one of you will have to do this at some point.

At a time like this, seeking advice from a professional can be helpful. At Britannic Place, we can provide invaluable support during this incredibly emotional time. In the meantime, it could be worth familiarising yourself with some of the rules and tax breaks associated with the death of a spouse or civil partner.

For example, you can usually inherit your spouse or civil partner’s estate free from Inheritance Tax (IHT).

Furthermore, if you both save or invest through ISAs, it’s worth noting that you can continue to make the most of the tax efficiency these accounts offer when one of you dies.

Since 2015, it’s been possible to continue enjoying returns free from Income Tax, Capital Gains Tax (CGT), and Dividend Tax when you inherit a spouse or civil partner’s account.

But, this doesn’t happen automatically and you’ll need to take concrete steps to benefit. So, it’s important to understand what one of you will have to do when the other passes away.

Read on to discover how this rule works, what you need to know to make the most of it, and how we can provide support.

The Additional Permitted Subscription allowance temporarily boosts your ISA allowance

The reason that you can tax-efficiently inherit wealth from a spouse or civil partner in ISAs is thanks to a rule called the Additional Permitted Subscription (APS).

In essence, the APS allows you to temporarily boost your ISA allowance for that tax year. You must be married or in a civil partnership and living together at the time of death to use the APS. You can still make use of it if your spouse or civil partner was living in a care home, too.

Normally, you can only contribute a certain amount of wealth into your ISAs each tax year. This is up to the ISA allowance, standing at £20,000 in 2024/25.

Meanwhile, when you use the APS, you increase your ISA allowance for the year by however much is saved in your partner’s accounts.

For example, if your partner had £40,000 in their ISAs, then the APS would temporarily increase your ISA allowance to £60,000 for the tax year you are using it.

The calculation for determining what your APS will be has varied over time, but since 2018, it has usually been the value of your spouse’s ISA at the estate completion date. You’ll need to get this figure from the ISA provider.

This calculation includes all types of accounts including Cash, Stocks and Shares, Innovative Finance, and Lifetime ISAs – although there are additional rules associated with the latter of these.

Interestingly, your APS allowance is independent to the actual cash or investments held in the accounts. That means you can apply for and make use of a higher allowance with other savings you have, even if your spouse or civil partner passes their ISA assets to someone else as part of their will.

To make use of the APS, your spouse or civil partner’s savings or investments must first be moved to a specific APS ISA, commonly referred to as an “inheritance ISA”.

You can only move the money from your spouse or civil partner’s account into this new ISA once, although you will get an APS for each ISA that they held.

Using the APS can save you on tax because you won’t be subject to Income Tax or CGT like you might have been had you inherited wealth outside of an ISA wrapper that subsequently generated taxable returns.

There are various pitfalls associated with using the APS

Although the APS can allow you to tax-efficiently inherit ISA holdings, it’s important to note that there are specific rules surrounding it that can make it a complex process.

Firstly, there are strict time limits for when you must apply for the APS, doing so within:

• Three years of the date of death for cash subscriptions
• 180 days of the date of death for Stocks and Shares ISAs
• 180 days of completion of the administration of the estate if you exceed the three-year limit.

Furthermore, and perhaps even more important to be aware of, not all ISA providers will accept APS transfers. And while some will accept transfers from a Cash ISA, they may not do so if your spouse or civil partner was not already a customer.

Meanwhile, you can typically only transfer a Stocks and Shares ISA to another account with the same provider – although of course, nothing stops you from subsequently transferring this money elsewhere.

This transfer will usually happen “in specie” – that is, the investments will be transferred while still invested, rather than being sold and bought back once in the new account.

Working with a financial planner can help ensure that you complete this process correctly

As you can see, there are various moving pieces with the APS and administering it correctly can be complex.

Fortunately, we can provide support at Britannic Place, helping you to correctly apply for the APS and find an appropriate home for your wealth.

Additionally, we’ll offer guidance throughout this time. Losing your spouse or civil partner can be incredibly distressing and, while still important, managing your money can fall to the bottom of the priority list.

So, by engaging with us, we’ll help you stay on an even keel and continue making sensible, informed decisions that ensure you’ll be financially secure now and in future.

If you’d like support with your ISAs or any other aspects of your wealth on the death of your spouse or partner, we can help.

Email info@britannicplace.co.uk or call 01905 419890 today to find out what we can do for you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.