The Additional Permitted Subscription (APS)
Spouses used to lose tax benefits on any ISAs left to them by their late spouse/civil partner. However, the December 2014 Autumn Statement gave them an additional one-off allowance that allows them to re-invest up to the amount of the ISA their spouse has built up and thereby retain the tax benefits in their own name.
Surviving spouses do not even need to be left the assets associated with the ISA – they can just make a new investment up to the value at date of death. So, if the value falls after death, it doesn’t matter, only the actual value at date of death. *Spouses are also given the option to change the ISA provider upon transfer, rather than being obliged to continue using the same ISA manager and holding the same assets as the deceased.
Points to bear in mind
1. Our experience has been that up until recently, institutions and stockbrokers were not up to speed with the changes. However, things have improved, although we are still experiencing some difficulties.
2. APS can apply to the total value of all ISAs affected by the deceased spouse during their lifetime. If during the transition period, the value of the ISA falls, then this can be made up again to the value at date of death.
3. One of the problems we envisage over the next 12 months is the effect (hopefully!) of a rising market, i.e. the assets rise above the value from date of death and therefore the input has to be scaled back accordingly.
4. *As far as we can see, once a surviving spouse starts to invest using the APS with one provider, they have to use that same provider for the total of the APS they wish to use (bear in mind they do not have to use the full APS allowance). However, if you are using a nominee account with a stockbroker or a platform, then this problem does not arise.
5. The surviving spouse does not have to inherit the value of the ISAs from the deceased spouse – they can be left to anyone – but the surviving spouse/civil partner is the only person who can receive the APS allowance.
6. Remember that the ISA wrapper dies with the spouse – the investment will no longer have the tax advantages whilst it is still in the estate. So, during the transition period the assets are liable to tax in the normal way.
IHT Planning
Not every estate will benefit from the new rules however, which means that some clients with significant ISA holdings could face a dilemma. On the one hand, they could keep their ISA money invested, continuing to get tax-free growth and income but recognising that IHT would have an effect on the value of their estate when they die.
Alternatively, they could choose to plan for their estate by reducing the amount liable to inheritance tax; for example, gifting, or cashing out the ISA (and losing the tax benefits) and moving the proceeds into trust. But neither of these options is necessarily going to be a satisfactory one for the investor.
For people who have accumulated large amounts in ISAs, it seems clear that in an ideal world the simplest solution would be to find a way to keep all the benefits of their existing ISAs, while leaving the ISA free of IHT.
In August 2013, the Government announced that shares listed on the Alternative Investment Market (AIM) could be held in ISAs. AIM was opened by the London Stock Exchange in 1995. Today it is home to more than 1,100 companies with an aggregate value of close to £72bn.
Business Property Relief
Many AIM-listed companies qualify for business property relief (BPR). Introduced in 1976, BPR was created to allow small businesses to be handed down through generations without incurring inheritance tax liabilities. Its scope has been widened in subsequent years, so that it isn’t just father-and-son/daughter-enterprises able to benefit. Shares that qualify for BPR fall outside of the scope of inheritance tax as long as the shares have been held for just two years, and are still held at the time of death.
Keeping control of the assets
Inheritance tax planning through an ISA can also deliver several other benefits. For example, clients retain access to their investment, allowing them to build capital value, take a regular income, or to dispose of their holding if circumstances change.
In addition, investing their ISA in companies expected to qualify for BPR means clients can avoid the type of complex legal structures, underwriting or medical questionnaires required for some types of estate planning.
Understanding the risks
There are, of course, risks for potential investors to consider, as investment capital is at risk and investors may not get back the amount invested. In addition, the performance of companies listed on AIM tends to be more volatile than those listed on the main London Stock Exchange, which means their value can fall or rise by greater amounts on a day-to-day basis.
Summary
In the past, individuals who had built up an ISA portfolio worth £100,000, for example, could have landed their family with a £40,000 IHT bill.
Now, those investors who are comfortable with the risks of investing in smaller companies have the option of transferring their ISA into AIM-listed, BPR-qualifying stocks, and completely wiping out the IHT liability after just two years, without losing any of the Isa tax benefits they have accumulated over the years.
This could prove to be an effective way to ensure that an ISA lives up to its tax-free billing – both before and after death!