Often, when thinking of what is involved in this, thoughts tend naturally to linger on IHT but since 6 April 2015, the government has introduced a new allowance to benefit surviving spouses - The Additional Permitted Subscription Allowance a.k.a. the Inherited ISA.
What is it?
Briefly, for people who died after 3rd December 2014, the surviving spouse or civil partner can pay up to the value of the deceased's ISA/s at date of death into either an inherited cash or stocks & shares ISA, in addition to the normal annual ISA allowance.
The Inherited ISA does not need to be established with the ISA Manager that held the deceased's ISA and the allowance can be used regardless of whether the surviving spouse actually inherited the asset held in the deceased's ISA. For example, the whole estate may have been gifted to the local Cat & Dog Home but the allowance is still available to the surviving spouse.
Cash subscription - Additional Permitted Subscriptions can be made using sums inherited by the spouse or from other cash they have available. They can be made to any combination of cash or stocks & shares, existing or new ISAs, provided that the ISA manager chosen can accommodate this; there is no obligation to choose the deceased's ISA manager. A series of subscriptions can be made as long as the total does not exceed the value of the deceased's ISAs at the date of death.
In specie subscription - Unlike contributions to standard ISAs, additional permitted subscriptions can be made using non-cash assets, subject to the following conditions:
- The non-cash assets subscribed were in an ISA held by the deceased at the date of death;
- The non-cash assets subscribed were inherited by the surviving spouse from the deceased. The regulations make it clear that the word "inherited" includes inherited under a will trust or as a result of a deed of variation; and
- Title to the non-cash assets at the point of subscription has been vested since the account manager was notified of the deceased's death i.e. the non-cash assets have remained in the deceased's ISA and have not been transferred out to the surviving spouse.
Non-cash assets are defined as:
- Any stocks and shares ISA qualifying investments other than cash deposits
- The following cash is qualifying investments;
- National Loan Act securities
- Depositary interests
- Short-term money market funds
- Money market funds
This means that a subscription of inherited non-cash assets must be made with the deceased's ISA manager. A transfer in specie to a new manager could be authorised by HMRC in circumstances outside of the surviving spouse's control, e.g. where the old manager makes a bulk transfer of assets to a new manager or where the old manager is no longer open for new business.
Income arising from the deceased's ISA, e.g. dividends, will not be transferable, although it may be possible to use it to fund a top up subscription if investment values fall post-death (see below).
Things to Consider
Single Payments - ISA managers can choose whether to accept subscriptions from a surviving spouse using the additional allowance and also choose whether to allow a surviving spouse to make a subscription using the additional allowance in instalments or to insist on a single payment. A manager who insists on a single payment must make clear to the surviving spouse that if that payment is less than the maximum additional allowance available, the rest of the allowance will be lost.
Time Limits - the time limit for making cash subscriptions ends three years after the date of death, or if later, 180 days after the administration of the estate is complete. The time limit for making non-cash asset in-specie payments is within 180 days of beneficial ownership passing to the surviving spouse. Where the estate makes an interim distribution followed by a final distribution, each will have a 180 day window for subscriptions to be made.
Non-Cash Asset Price Fluctuation - The value of the assets at the time of the additional permitted subscription is made counts towards the additional permitted subscription limit, which is set at the value at date of death. This means that if values rise in the period between death and the APS taking place then not all of the assets can be used as part of the subscription. However, if the value falls then all of the non-cash assets can be subscribed in-specie and a cash "top up" can be made to bring the value up to the value at the date of death.
Because of this rule, the net result is that an in specie transfer will never be a simple movement of holdings from old to new ISA, unless the value at the date of death is matched by the value at the date of the surviving spouse's subscription.