Thousands of bereaved savers could be needlessly paying tax on inherited Isa cash every year – and the money could be gone for good
- Some 21,000 married people inherited their partner’s Isa balance last year
- This is despite the fact couples have been entitled to an allowance since 2015
- One expert warns that the average person could be missing out on £110 a year – and if you don’t take advantage you can’t get it back from the taxman
Six out of seven bereaved partners across the UK could be unnecessarily paying tax on Isa savings they inherit from loved ones, according to official figures obtained by Zurich.
Last year, just 21,000 people used rules introduced three years ago to inherit their partner’s Isa balance tax-free.
It is estimated that 150,000 married Isa holders pass away every year, suggesting as few as 14 per cent of savers made use of their tax-free allowance.
Forfeiting cash: Just 21,000 people used rules introduced three years ago to inherit their deceased partner’s Isa savings
The number of married Isa holders estimated to pass away every year is more than double the number of those reported to benefit from the rules over the last three years.
Since April 2015, married couples and civil partners have been entitled to an extra Isa allowance when their partner dies under Additional Permitted Subscription rules.
This extra allowance is equal to the value of your partner’s Isa account at the time of their death, and is on top of your usual Isa allowance of £20,000.
However, the system appears complicated, and rule changes made in April last year may have further baffled bereaved savers looking to make use of APS.
Your partner’s Isa would lose its tax-free status from the date of their death if they died before 5 April 2018, which would mean any interest paid while the estate was being wound up would be taxable.
But if they died on April 6 this year or later, any interest paid while the estate is being wound up is also tax-free.
That eligible partners are confused by the system appears borne out by figures obtained from HMRC through a Freedom of Information request by insurer Zurich, which found as few as 14 per cent of savers who could potentially benefit made use of APS rules in 2018.
That number is also down 4,000 compared to 2017, when 25,000 people made use of APS rules.
|Year||Number of APS reported||Value of APS reported|
|2015 – 2016||15,000||£635 million|
|2016 – 2017||25,000||£1.105 billion|
|2017 – 2018||21,000||£1.17 billion|
|SOURCE: HMRC (Freedom of Information request made by Zurich)|
According to the data, the 21,000 people who benefited from a deceased partner’s Isa allowance last year added over £1.1billion to their savings. The average annual amount gained was £55,000, up £10,000 from the year before.
In total, over the last three years 61,000 people made use of APS rules, obtaining nearly £3billion.
But with the latest figures from the Office for National Statistics showing there are more than 22.1 million Isa holders in the UK, Zurich raised concerns thousands could be missing out on the allowance.
Alistair Wilson, the insurer’s head of retail platform strategy, said: ‘Despite being in its fourth year, the take-up of this tax break looks shockingly low.
‘People who miss out on the allowance will be hit by a tax bill that quickly eats into the returns on their savings and slows down the growth of their nest egg.
‘With the average value of an inherited Isa standing at £55,000, savers could be giving away £110 a year which they could have legitimately avoided.’
What’s more, if a person didn’t take advantage of the subscription, and then incurred tax on the interest, they wouldn’t be able to reclaim this from the taxman, meaning that money could be gone for good.
He added: ‘Under APS rules, if your partner had £50,000 in Isa savings when they died, you would be able to invest £50,000 tax free on top of your own £20,000 annual Isa allowance – taking your total allowance for the year to £70,000.’
Carol Knight, chief operations officer at the Tax Incentivised Savings Association, added: ‘These figures point to a worrying lack of awareness among consumers when it comes to accessing funds that are rightfully theirs.
‘APS is a really useful scheme which provides partners with access to money that could potentially provide much needed financial stability during a difficult time.
‘The rules around inheriting Isas are complicated, and clearly more needs to be done to ensure bereaved partners understand the options available to them.’
How to get your tax-free allowance
You can make Additional Permitted Subscriptions with either the manager who held your deceased partner’s Isa, or another manager who agrees to accept the subscriptions.
If making the subscription to the manager who held the deceased’s Isa, the subscription can be made to a cash, a stocks and shares, an innovative finance, or to a Lifetime Isa the surviving spouse holds with that manager or to a new cash, stocks and shares, innovative finance, or Lifetime Isa opened for the purpose.
An Isa opened solely to receive the additional permitted subscriptions will not cause the saver to breach the ‘one Isa of each type per tax year’ rule. A surviving spouse can only pay £4,000 into one Lifetime Isa each tax year.
Before an additional permitted subscription can be made the surviving spouse must provide the following information to their Isa manager:
-full name of the deceased
-permanent residential address of the deceased at the date of death
-date of birth and date of death of the deceased
-deceased’s NINO (if known)
-date the marriage or civil partnership with the deceased took place
-identity of the account manager who managed the deceased’s Isa.
When making an additional permitted subscription, a surviving spouse must make a declaration confirming:
-they are the surviving spouse of the deceased
-they were living with the deceased within the meaning of section 1011 of the Income Tax Act 2007 at the date of the deceased’s death
-the subscription is made under the provisions of regulation 5DDA of the Isa regulations
-the subscription is being made, in the case of ‘in specie’ transfers, within 180 days of beneficial ownership passing to the surviving spouse or in the case of cash subscriptions, within 3 years of the date of death, or if later, 180 days of the completion of the administration of the estate.
Additional guidance can be found here.