Individual savings account (Isa) investors will see their allowance pass to their spouse the tax year after they die, following changes announced in the Autumn Statement.
Previously, the tax wrapper passed away with its owner and money that had been sheltered became liable for income and capital gains tax thereafter.
The deceased will be able to pass on their Isa wrapper to their spouse or civil partner via an additional Isa allowance which they will be able to use from 6 April 2015.
The surviving spouse or civil partner will be allowed to invest as much into their own Isa as their spouse used to have, in addition to their normal annual Isa limit, and receive the income and capital gains from this free of tax.
There was no mention of excluding Isa assets from inheritance tax. Therefore, experts at Hargreaves Lansdown are assuming that from 3 December 2014, if an Isa holder dies, the Isa wrapper and tax-efficient status are still lost as at the date of death until they are reinstated on 6 April 2015. The investments are passed on to beneficiaries as part of the estate and subject to inheritance tax (although there is no IHT on inter-spouse transfers). The government says that previously 150,000 people a year were losing out on the tax advantages of their partner's Isa when their partner passed away.
Further improving the Isa regime, the chancellor has also announced that the Isa allowance will increase to £15,240 in April 2015.
The chancellor has also announced that, from April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive income as well as lump sum payments from those policies free of any death tax. This brings annuity death tax in line with income drawdown.
Alan Higham, retirement director for Fidelity Worldwide Investment, says that abolishing the death tax on products such as drawdown and annuities, raises the likelihood of those in defined-benefit (DB) schemes transferring out if they are in ill health. This could, in turn, create funding concerns for DB schemes as they seek to pay out benefits to their remaining members.
Kate Smith, regulatory strategy manager at Aegon, says: "Most people view their house as the major financial asset that they leave behind to their loved ones. The chancellor has sought to put both pensions and Isa savings on an equal footing by encouraging people to view them as assets that can be passed on without punitive rates of tax.
