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Starting from 6th April 2018, it will be possible for married couples and civil partners to leave their spouse an ISA when they pass away and thereby benefit from an additional tax break potentially worth thousands of pounds.
Currently, when a spouse leaves their partner an ISA in their will, the full value can be inherited without triggering any tax. This because the surviving spouse is granted an additional one-off ISA allowance, known as an ‘additional permitted subscription allowance’. This covers the value of whatever was held in the ISA at the time of death.
How to pass on an ISA tax free
However, any increases in value between the date of death and completion of probate are not currently tax free and during a lengthy probate application, the value of an ISA can potentially increase significantly. Until the start of the new 2018-19 tax year, this increase is taxable because tax free ISA wrapper effectively ceases to exist on death. This changes from 6th April 2018 when any increases in value can be passed on to a surviving spouse without extra tax liability.
Given that it can take months or sometimes even years for a grant of probate on complex estate, the potential savings to be seen from this change in tax policy may be significant. Consider the following example:
Mrs Brown inherits her husband’s ISA which is valued at £1m on his death. He doesn’t leave a will and it takes 2 years to obtain grant of letters of administration, during which time the value of the ISA has increased by 10%. Mrs Brown is a higher rate tax payer and has to pay capital gains tax at 20% on the increased of £100,000 in value, resulting in a £20,000 liability. After 6th April 2018, no additional tax would be due.
Under the new rules, Mrs Brown can potentially keep the ISA and allow it to continue to increase in value without incurring any additional tax - either until probate is completed, the ISA is closed, or 3 years after the original account holder's death – whichever is sooner.
Who can benefit from new tax free transfer rules?
This change will benefit a significant number of people as HM Revenue and Customs (HMRC) report that around 300,000 ISA investors die each year. Our advice to all taxpayers with investments is to write a will, maintain clear financial records and ensure your financial affairs are well managed.
Probate is the official process of administering the estate of a person who has died, dealing with the tax position and ensuring the net estate is distributed to those who will inherit, after discharging any debts and liabilities. It can be complex, and having a reliable, trusted advisor, someone you know well and who can deal with all matters, takes away the worry at what is already a stressful time.
If you would like help to obtain a grant of probate or need inheritance tax planning advice, please contact us by emailing partners@rjp.co.uk
I wanted to write and express our gratitude for your help and hard work in getting Probate through and settling all the taxes. I am so pleased that we selected RJP, as your professional help and updates throughout this process have been invaluable. If at any time in the future Probate assessment may be needed, you will be our first port of call. Once again, many thanks to the whole team.
Dan Cook, Probate clientI just wanted to drop you a short note to say how grateful I am for the support that RJP has provided over the past 4 weeks while our Financial Controller was away. I struggle to comprehend how much work your staff get through during their weekly visits and they are always a pleasure to have around the office.
I Evans, CFO, MoblicitiJust a quick e-mail from me to thank you for achieving the target for producing the draft accounts – it is very much appreciated and gives a first class impression of your firm. Many thanks.
J Stanfield, Chairman, BBS Actuaries LtdI would like to take this opportunity to thank you very much for the amazing job you have done navigating us through this whole process. My family and I also really appreciate the care and compassion demonstrated by you and your team in every dealing. Our thanks to everyone.
M Goldsmith, Probate ClientRJP provide our company with a complete service which takes the stress and strain away from the day to day running of our accounts! Their understanding of our business and their patience and advice is invaluable.
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If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.