What happens if you inherit an ISA from your spouse?

The rules governing ISAs mean they cannot be opened or held on a joint basis, including with spouses. But many couples will divide their joint savings between them, opening an ISA each to take maximum advantage of the personal tax-free savings limit, which this year is £15,240.

However, where a couple may have effectively been able to save over £30,000 a year tax-free, the newly widowed may wonder where they stand.

Last year, the Treasury changed the rules governing what happens in the event of the death of a spouse, introducing the Additional Permitted Subscription (APS). Under APS, the surviving husband or wife now receives an increase in his or her tax-free ISA allowance, equivalent to the balance of the deceased’s ISA, regardless of whether they are actually inheriting funds from the deceased’s ISA.

This means that if the deceased had an ISA with a balance of £40,000 and his or her estate was settled this financial year, the surviving spouse’s ISA allowance would increase to £45,240, regardless of whether they actually inherited the funds from the deceased’s ISA.

However, the APS rules come with a number of conditions. The surviving spouse must use the additional allowance within three years of being widowed or within 180 days of the settlement of the estate if that is later. Also, APS applies only to spouses or civil partners of ISA holders who have died since 4 December 2014.

Not all ISA providers offer APS either and some providers only offer APS if both the deceased and surviving spouses held accounts with that provider.

This highlights the importance of planning to ensure sure your spouse will not be disadvantaged should the worst happen.

Link: Gov.uk