Last month, financial web site of the year, This Is Money, revealed that some banks and building societies are paying less interest on ISA cash inherited by bereaved spouses than on normal ISA savings.
From our Will writing experts’ conversations with clients (upon whose Wills online they provide legal checks) it’s clear that few people know this and fewer still are aware when they are making a Will that planning for partners to inherit ISAs is a tax efficient thing to do.
As such, we thought we’d share these 7 things you need to know about inherited ISAs…
Many people do not realise that since April 2015 they have been entitled to an extra ISA allowance when their partner dies. In fact they are entitled to the amount of money in their partner’s account, including interest, at the time of their death.
This means that when the cash is released from their deceased partner’s estate, they can transfer the lot into their own ISA without using any of their £20,000 allowance. So if their partner had saved £20,000, their allowance that year would rise to £40,000.
Big banks such as Halifax, Lloyds, NatWest and RBS let customers add the extra allowance to their own ISA. Other providers offer a special account for the top-up — but, according to Money Mail, the rates here are not always as good as people would get on their own ISA.
Skipton pays 0.5 per cent on its Legacy ISA compared to 1 per cent for your normal allowance through its Bonus Cash ISA. The Nationwide Inheritance ISA also pays 0.5 per cent, but once you have opened the account, you can transfer it to a Flexclusive ISA at 0.75 per cent if you qualify for it. Coventry Building Society pays 1.75 per cent on its Additional Allowance ISA — (but only if your partner had an ISA with them)
Top deals, according to Money Matters, include NS&I Inherited Allowance Account at 0.75 per cent and West Bromwich BS Additional Permitted Subscription ISA at up to 0.85 per cent.
If your partner died (or dies) after December 3rd 2014, you are given the Additional Permitted Allowance (APA) whether or not you inherit the money.
This means that any interest earned between then and when you move the money into your own ISA is taxable.
Given that the money left in the account of a deceased partner will cease to earn interest form the date if the partner’s death, it’s great to be aware that you can move it into your account immediately. You do not have to wait for probate to come though. You do not need to lose out on your tax-free allowance.
If this is the first you were aware of this shrewd tax move and your partner died with the last three years, you can still benefit. The rules are that you must use it within three years from the date of death, or 180 days of the completion of the administration of the estate, if that comes later.
To claim the allowance, simply fill in a form from your chosen ISA manager. You don’t have to stick with your provider. You can switch to another, so long as they offer this type of ISA, and, as Money Matters research reveals, it is worth shopping around.
“Beware that if you just top up an easy access ISA account, the rate is likely to be terrible. Many providers pay just 0.05 per cent on the standard ISA accounts that permit inheritance top-ups. Information about whether the account allows a top-up is often tricky to find, buried deep in the small print or on web pages, so check before you apply.”
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