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11 Jan 2019

Thousands needlessly paying tax on inherited Isa savings

Grieving partners could have avoided £110 on average last year

Six out of seven bereaved savers could be needlessly handing over tax on savings they inherit from a deceased partner, according to new figures.

Since April 2015, married couples and civil partners have been entitled to an extra Isa allowance when their partner dies under the Additional Permitted Subscription (APS) rules.

However, HMRC figures obtained by investment platform provider Zurich reveals just 21,000 grieving savers took advantage last year, out of a potential 150,000 that were eligible.

Which? takes a look at how the Isa inheritance rules work, why there has been such a low take-up of the tax break and how much this missed opportunity is costing savers.

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How can you inherit an Isa tax-free?

Under APS rules the spouse or civil partner of a saver or investor that has passed away on or after 3 December 2014 is able to benefit from the value of their Isa.

Instead of inheriting the Isa itself, the partner is given a one-off extra allowance equal to the value in the deceased partner's Isa account at the time of their death.

So if your partner had £30,000 in Isa savings when they died, you would be able to invest £30,000 tax-free on top of your own £20,000 annual ISA allowance - taking your total allowance for the year to £50,000.

If you inherit the cash you can choose to keep the money with the original Isa provider put the money with your own Isa provider or open up a new cash Isa or stocks and share Isa.

But usefully this additional allowance applies even if you didn't actually inherit the cash in the Isa - though to take advantage you would need to use your own money to fund it.

Who's missing out on this Isa benefit?

Using a Freedom of Information request, Zurich has obtained figures from HMRC which reveals a persistently low number of bereaved savers are taking advantage of the APS.

In 2017/18 just 21,000 benefited from a deceased partner's allowance, extending their tax-free savings by £1.17bn.

The Tax Incentivised Savings Association (TISA) estimates 150,000 married ISA holders pass away annually - which suggest as few as 14% of grieving savers made use of the allowance and 86% could have missed out.

The table below shows the reported number of APS since its introduction in 2015 and the value sheltered from tax over the last three years.

Number of APS reportedValue of APS reportedAverage value of APS

Source: HMRC via a Freedom of Information request from Zurich

How much are bereaved savers losing?

With the average value of an inherited Isa at £55,000, it is estimated bereaved savers that didn't take advantage of APS rules could have missed out on hundreds of pounds of interest last year.

According to Zurich a basic-rate taxpayer receiving a typical interest rate of 1% per annum on £55,000 would incur an additional tax of £110 per annum, assuming they have no personal savings allowance (£1,000) left to offset this.

But the impact is far greater for a higher-rate taxpayer. Assuming they had no personal allowance (set at £500 for this tax bracket) to offset the impact this group of savers could have lost out on £220.

Barriers to the additional Isa allowance

It's not entirely clear what's stopping some savers from taking advantage of the APS allowance.

Some could be confused by the rules or unaware they exist to help them. Another likely barrier is that not all providers are obliged to accept a transfer of an APS allowance.

Which? analysed Moneyfacts data in March 2018 and found that only 21% or 64 of the 308 fixed and variable rate cash Isas on the market at the time would accept APS cash Isa transfers.

However, a few providers have launched products specially designed to take advantage of the new rules, including the Government-backed National Savings and Investments and some leading high street providers like Coventry Building Society.

Watch out for restrictions though as some of these accounts will only accept APS payments if the deceased Isa holder was a customer.

How to take advantage of APS rules

The increased Isa allowance can be claimed by filling out an application form and is available for three years after the date of death, or if longer, 180 days after the estate has been administered.