INDIVIDUAL SAVINGS ACCOUNT
Synopsis: We look at who is eligible, the subscription limits and rules, the permitted period and the transfer process.
Background
Draft regulations to implement the ability to transfer ISA benefits to a surviving spouse/civil partner have now been published – see our earlier bulletin. In this bulletin we examine the impact of these draft regulations. What follows is based on draft regulations which could, of course, change before final implementation.
Introduction
In the Autumn Statement, which was delivered on 3 December 2014, it was announced that the ISA rules would be amended to provide for the spouse or civil partner of a deceased ISA saver to receive an additional ISA allowance up to the value of the deceased saver’s ISA at the time of their death. In addition, the additional ISA allowance would not count against the surviving spouse’s/civil partner’s annual ISA allowance.
The proposed changes will have effect from 6 April 2015 in respect of deaths which occur on or after 3 December 2014. These changes do not apply to the JISA.
In this bulletin we refer to the additional allowance as the ‘additional allowance subscription’.
Who is eligible to make an additional allowance subscription?
(i) The surviving spouse/civil partner of an ISA saver who died on or after 3 December 2014. At the time of death the deceased ISA saver and the surviving spouse/civil partner must have been living together as defined in section 1101 of the Income Tax Act 2007.
(ii) The additional allowance subscription must be made to an ISA, re-wrapped in the name of the surviving spouse/civil partner. The re-wrapped ISA must be managed by the account manager who managed the deceased’s account. However, the regulations (at 5DDA(7)) provide that HMRC can authorise another account manager to accept a subscription from the surviving spouse/civil partner. The relevant part of the tax information and impact note (TIIN) reads as follows:
‘In most cases, it is anticipated that the additional allowance should be used to subscribe to an ISA offered by the same financial institution that provided the deceased saver’s ISA. An eligible individual may use this additional allowance by subscribing to an ISA they already hold, or by opening a new ISA.’
We understand that HMRC has stated that regulation 5DDA (7) ‘…provides for cases where a provider is unable to accept an additional permitted subscription, for instance because their book of business is closed. Where the manager is unable to accept a subscription they would need to refer to HMRC.’ The TIIN, to which HMRC has been referred, is thus perhaps not telling the whole story.
These regulations are in draft and it is to be hoped that the final version incorporates a little more flexibility on this point.
The subscription limit
The amount of the additional allowance subscription(s) cannot exceed the total value of all of the ISAs owned by the deceased at the date of their death.
The subscription rules
An additional allowance subscription can be made in cash or in specie (called non-cash assets).
a) Cash subscription
In this situation, on death the ISA will come to an end (as it does currently) by the deceased’s personal representatives taking the cash from a cash ISA, or arranging for the assets in a stocks and shares ISA to be liquidated or assigned to a beneficiary of the deceased’s estate.
Once this occurs the surviving spouse can make an additional subscription up to an amount not exceeding the value of the deceased’s ISA(s) at the date of death. The surviving spouse can make this additional subscription irrespective of who inherits the proceeds of the ISA. For example, the whole of the deceased’s estate could pass to a charity but because the deceased’s ISA has terminated their spouse can make an additional allowance subscription within the permitted time limits – see section 6. A subscription may also be made when there is an in specie subscription (see b) below) and the value of the non-cash assets at subscription is less than their value at death.
(b) In specie subscription
For an ordinary subscription to an ISA to count it must be in cash subject to one exception for shares awarded under certain share option schemes. In contrast, an additional allowance subscription can be in cash or in specie (called ‘non-cash assets’).
Where the amount subscribed is made up of non-cash assets then the following conditions apply:
(i) The non-cash assets subscribed were in an ISA held by the deceased at death;
(ii) The non-cash assets subscribed were inherited by the surviving spouse/civil partner from the deceased; and
(iii) The non-cash assets at the point of subscription remain in the ownership of the account manager i.e. the non-cash assets have remained in the deceased’s ISA and have not been transferred out to the surviving spouse/civil partner.
The non-cash assets that can fund an additional allowance subscription are those investments that qualify for inclusion in a stocks and shares component apart from cash; and the following assets which qualify for inclusion in a cash component
a) Certain securities issued under the National Loans Act 1968
b) A depositary interest
c) A short-term money market fund as defined
d) A money market fund as defined
When a non-cash asset subscription is made the amount of the subscription is equal to the value of the asset at the date of subscription. Because of this rule, the net result is that an in specie transfer will never be a simple movement of holdings from old to new ISA, unless the value at the date of death is matched by the value at the date of the survivor’s subscription:
• If values rise after death, then some of the former ISA holdings effectively become non-transferable (in ISA terms);
• If values fall between death and subscription it will be possible for the survivor to make a full in specie transfer and a top-up cash subscription.
Just to complicate matters further, HMRC has confirmed that there is no change in the tax treatment of ISAs following death. Thus post-death income and gains will be taxable on the estate, even though for an in specie transfer it is a requirement of the regulations that ‘immediately before that [survivor’s] subscription, title to those assets is vested, and has continuously since the deceased’s death been vested, in the account manager or his nominee or jointly in one of them and another.’
Income arising from the deceased’s ISA, e.g. dividends, will not be transferable, although it may be possible to use it to fund a top up subscription if investment values fall post-death.
The “permitted” period
A subscription funded by non-cash assets must be made within a period which runs for 180 days from the date those non-cash assets were distributed to the surviving spouse/civil partner by the deceased’s personal representatives.
Any other subscription – which basically means cash – must be made within 3 years from the deceased’s date of death or within the 180 day period following completion of the administration of the deceased’s estate if this date is later.
In connection with ‘any other subscription’, if the deceased died on or after 3 December 2014 but before 6 April 2015 they will be treated as dying on 6 April 2015 for the purposes of the ‘3 year rule’.
Making an additional subscription
An individual who wishes to make an additional subscription will be required to provide certain information and give certain declarations to the provider as follows:-
• Information
– the deceased’s full name;
– the deceased’s full permanent address at the date of death;
– the deceased’s NINO, or confirmation they did not have one;
– the deceased’s date of birth and death; and
– evidence that the individual making the additional subscription was the spouse or civil partner of the deceased.
• Declaration
An additional allowance subscription will not count as an additional subscription which counts against the surviving spouse’s/civil partner’s provided satisfactory declaration are given by the surviving spouse/civil partner as follows:-
– he or she is the surviving spouse/civil partner of the deceased and that the couple were living together at the time of the deceased’s death;
– the subscription is an additional permitted subscription; and
– the subscription is being made within the permitted time limits (see section 6).
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