Estate planning and transferable ISAs

Major new tax breaks await two of the most tax-effective means of saving: from 6 April 2015, ISAs (along with pensions) get a tax boost.

Transferable ISAs

This was one of the surprises
in the Autumn Statement of
3 December 2014. At first, it all seemed so simple: a widowed person could have an extra ISA allowance equal to the value of their deceased spouse’s ISA.
It has not been so simple in practice, however, causing some real drafting headaches and leading professional bodies to make submissions asking HMRC to sort out uncertainties and technical problems.

Two points in the draft regulations which require particular attention concern non-cash (stocks and shares) ISAs:

1. Such ISAs need to be held
by the ISA manager from
the date of death until ‘subscription’ by the surviving spouse with the same ISA manager. So, take care to keep in place any non-cash ISA where the holder dies on or after 3 December 2014, as the surviving spouse might
wish to take on the extra subscription from 6 April 2015. The ISA needs to be kept with the same manager, unless HMRC approves otherwise.

2. More significantly, the draft regulations require the surviving spouse to ‘inherit’ the non-cash ISA, although ‘inherit’ is not defined. It is unclear why cash ISAs do not need to be similarly inherited. Unless this requirement is removed, it raises significant estate-planning issues, on which you may need to work closely with a specialist financial or tax planner to help clients reach the right solution.

When the regulations are finalised, if a spouse needs
to inherit a non-cash ISA, any married person making a will needs new advice to establish whether they wish their spouse to inherit the ISA if they die first. Many new wills and codicils may need to be made. Many clients who have had ISAs for many years have built up substantial values, which can exceed £500,000, so ISAs can be a major issue where the estate does not all pass to the spouse outright, especially if the deceased has a second family.

It is not clear whether a spouse can inherit an ISA through an estate left in trust. Could an advancement of capital to a spouse-life tenant result in their being treated
as ‘inheriting’ the ISA?
Similarly, what about a deed of variation creating a legacy for the spouse, which is treated for inheritance tax as ‘read back’ into the will for all purposes, whereas ISAs have special income tax and capital gains tax (CGT) benefits?
The limited application of CGT to variations is not for all purposes. This will hopefully be clarified by amendments before 6 April 2015.

Tax opportunity

Whether to take up this new opportunity depends upon:

1. The tax advantages of a surviving spouse having the extra ISA allowance from their late spouse. Would the extra tax-free income and gains of an increased ISA account, assuming there were resources to invest, make this the right option? Just because there
is a tax opportunity does not mean that it should be used.
If the surviving spouse has
an accountant or tax adviser dealing with tax returns,
it may be best to seek their input.

2. A financial planner’s input is also needed to consider the place of a non-cash ISA within an overall investment strategy, factoring in the risks and rewards.

What resources are available?

This needs to be addressed during the spouses’ joint lifetimes in order to plan ahead, even if this will need further review after the first spouse’s death.

It would be wrong to address the purely legal aspects without taking these tax and financial-planning aspects into account. Ideally, where the client is paying for the advice, the lawyer and financial planner will liaise, with a tax adviser if appropriate, so that informed choices can be made.

Do beware of clients pressing for ‘off the cuff’ advice when you are without the time and fees to properly think through the details or unqualified to comment.

Most importantly, do be clear who your client is and the duty you owe that client, and take care if any conflict arises (for example, between a surviving spouse and the executors or trustees of the deceased’s will, who may include that spouse), so that one of the parties needs independent advice. SJ

John Bunker is head of private client knowledge and management at Thomas Eggar

@ThomasEggarLLP