InsightsInsight - Family and Divorce - POSTED: September 14 2015
Transferable ISAs and the complexities that surrounds them
New transferable ISA rules came into effect in April 2015 allowing spouses with ISAs to pass the ISA allowance of the first to die to the survivor of them. The rules however bring with them complexities which were highlighted in the case of a recent client.
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The clients here were a married couple with significant stocks and shares ISAs in excess of £500,000 each and wanted to take advantage of the new rules. The idea here was that, as the husband was significantly older than the wife, the survivor (mostly likely to be the wife), would inherit his ISA allowance and benefit from a cumulative ISA allowance in excess of £1,000,000, resulting in income tax and capital gains tax free investment.
The issue, however, was that the couple in question both had children from previous marriages; the usual advice for couples with these types of circumstances is to leave the assets of the first to die into a life interest trust for the survivor so as to protect these assets (from redirection after first death) for their children on the second death.
The question posed here by the clients was whether the ISA allowance could still pass if the clients left everything on the first death into a life interest trust for the survivor.
Whilst the legislation refers to the spouse needing to inherit the asset to utilise the husband’s ISA allowance and the word ‘inherit’ is defined as including under a will trust, it appears that the ISA allowance cannot pass into a life interest trust because the ownership of the ISA passes to trustees.
It seems that it is not therefore possible to leave ISAs on first death into a life interest trust and take advantage of the transferable ISA rules.
In this case, the clients’ wills were structured to leave the ISA of the first to die outright to the survivor (to take advantage of the transferable ISA rules). Additionally, an expression of wishes was included specifying that he wanted a sum equal to that which the survivor inherited to pass under the survivor’s will to the children of the first to die on second death. Another alternative would have been to leave the ISA of the first to die into a fully discretionary trust which could have been varied within two years of death taking into account any particular circumstances at the time.
The change these rules bring will no doubt be welcomed by married couples and civil partners; however, the complexities that can arise should prompt couples to have their wills carefully drafted or reviewed in order to take advantage of this tax break. Brachers can advise on transferable ISAs and drafting wills
This content is correct at time of publication
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