Inheriting ISAs

It seemed such a simple
idea – let married couples pass ISAs on to each other – but this recent tax change gloriously illustrates the clichéd devil in the detail. Announced in the Autumn Statement on
3 December 2014, the detail
was too complex for the draft Finance Bill, instead going into draft regulations in January 2015. The new legislation, finalised by the end of March and effective from 6 April
2015, had significant changes – particularly responding to industry criticism, but that’s only part of the detail.

Much of the Individual Savings Account (Amendment No 2) Regulations 2015 does not
make sense on its own. It is comprehensible with reference to HMRC’s draft guidance for
ISA managers, which was issued with ISA manager bulletins 64 and 65 at the end of March 2015. Some parts of the regulations
are nonsense, in some cases seemingly changed by the guidance, but we must rely
on what HMRC says.

The starting point is that if
one spouse dies, the surviving spouse (SS) can subscribe for additional ISA allowances, based on the probate value of the deceased’s total ISA savings. Many have built up a considerable amount in ISAs, including old personal equity plans transferred across, often £100,000 to £500,000 in value. Some have all their ISAs managed by a single fund manager, but many have separate ISAs with different
ISA managers, including banks, unit trust companies, and fund managers.

At first, spouses were to be required to keep ISAs with the same manager, which would have simplified compliance, especially with equity investments changing value. That has now been replaced with the concept of ‘another manager who agrees to accept responsibility for monitoring the additional permitted subscription limit’. Controlling the total new amount (including increased equity value) to ensure it stays within the probate value is essential.

Non-cash ISAs

The first draft of the regulations appeared to distinguish between cash ISAs and ‘non- cash ISAs’, but the guidance helps us see a subtler distinction: between subscribing with non-cash assets and subscribing with cash. Only inherited non-cash assets can be used to make
an additional permitted subscription in specie. If an
ISA is not inherited, you must subscribe in cash – but that can be the full probate value of your spouse’s ISAs, both cash and non-cash. The final form regulations now specify that ‘“inherits”…includes inherits under a will trust or as a result
of a deed of variation’. So, a
deed of variation passing the ISA to SS outright is fine.

Appropriation

If the ISA is part of the residue
of the deceased’s estate, or is appropriated to SS to satisfy a legacy or share of the residue, logically that must be acceptable, especially as
the guidance refers to a time limit for subscribing ‘within 180 days of beneficial ownership
passing to’ SS. The regulations confusingly refer to this
time limit for subscription of non-cash assets as 180 days ‘beginning with the distribution to S by the deceased’s estate of the non-cash assets’. This makes no sense when read alongside the requirements for non-cash assets, which instruct that the ISA manager must retain them from death until subscription.
It can only mean a beneficial distribution, as the guidance confirms. If you fail this 180 day test, there is a longer time limit for cash subscriptions – three years or 180 days from the end of the administration.

Will trust

The regulations would be clearer if they referred to inheriting through, rather than under, a will trust. What does this mean for
an immediate post-death interest (IPDI) trust giving SS a life interest, or a discretionary trust (for example, of the whole estate or a nil-rate band trust) of which SS is a beneficiary?

The answer is, as noted
above, that this is only about subscribing in specie with
the non-cash assets and must therefore mean the actual assets pass into the name of SS personally. So, capital could be advanced out of an IPDI trust
to SS, or appointed out of a discretionary trust to SS, and,
in either case, SS could then subscribe for additional permitted subscription with those assets that were inherited through the trust.

While the significance of
the need to inherit is far less than at first sight, it means that many trustees will need to
consider the exercise of their discretionary powers, whether to advance or appoint out, so that the capital ceases to be secured within a trust.
A previous article (SJ 159/9) addressed these issues in their estate-planning context. Suffice to say, the need to review letters of wishes and the guidance given to trustees about how they exercise their powers with reference to ISAs
is still very real. SJ

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

@ThomasEggarLLP