You can use a financial tool called an individual savings account (ISA), to save money, tax-free. You may wish to bequeath your ISA to a loved one after you pass away, to provide for them financially in future. Prestige Tax and Trust Services asks: Can you transfer an ISA on death to someone else?
Tax free status
Under UK law, every adult can save a certain amount of money (currently £15,420) tax-free per year. When you die, your ISA loses this tax-free wrapper, so if you bequeath it to a loved one, the vehicle could potentially limit how much they can save via ISA for that year. This means that you can bequeath an ISA to a loved one by writing a will, but they may lose certain tax benefits.
The one exception is your spouse. If you bequeath your ISA to your spouse, they gain an ‘additional permitted subscription,’ which basically acts as a one-off allowance. This is added to their current allowance for the year, allowing them to keep the tax-free wrapper for your ISA savings and their own. This means that they can earn the interest and savings without paying any additional taxes.
The Telegraph notes that for inheritance tax purposes, an ISA counts towards the value of your estate, like your other assets. Therefore, if you bequeath an ISA in your will, it could push your estate past the inheritance tax threshold (currently £325,000.) Therefore in this case, your estate may be liable to pay a 40% inheritance tax on any assets above this limit. Again this is where your spouse is the exception.
You can pass your ISA to your spouse, free of inheritance tax, as transfers between married couples or civil partners are exempt from this charge. You should remember, however, that the total value of the ISA may be added to the value of your spouse’s estate on their death, potentially subjecting them to a 40% inheritance tax. You can pass your own inheritance tax nil-band rate to your spouse though, meaning their estate could be worth up to £650,000, before becoming liable to this charge.
But if you plan to pass your ISA onto someone other than your spouse, you can avoid inheritance tax with trusts. Once you place an asset into a trust, you no longer legally own it – the vehicle’s trustee does instead, so it does not count towards the value of your estate, for inheritance tax purposes. This means that you can bequeath an ISA to a loved one in your will, while avoiding inheritance tax.
You could, for example, take £325 of savings from your ISA, convert it into cash and gift these proceeds in a flexible reversionary interest trust. With this strategy, you would remove the remove the capital and growth from your estate after seven years, resulting in a potential inheritance tax saving of £130,000. Remember, though, that some trusts come with their own inheritance tax obligations.
Prestige Tax and Trust Services
If you decide to utilise a trust, to pass your ISA onto your loved one when you die, remember that trust law is complex. It is wise to enlist expert aid, through firms such as Prestige Tax and Trust Services. We have the experience you need to ensure that you can gift your ISA onto a loved one through a trust, while limiting your estate’s inheritance tax obligations, after you pass away.