Martin Lewis warns ISA savers your cash could face 40 per cent tax | Personal Finance | Finance
Martin Lewis has clarified the rules around tax on ISAs as they can be subject to a 40 percent HMRC levy. The financial expert was asked on his BBC podcast about what happens to your ISA allowances should you die and you pass on your ISA savings to a spouse or civil partner.
Under current rules, a person can deposit up to £20,000 each tax year into ISAs, and this allowance can be split as you choose between different types of ISA, such as stocks and shares ISAs or cash ISAs. A key benefit of ISAs is they are entirely tax-free, as long as you keep your deposits within your annual allowances.
The listener said both he and his wife are in their early 60s, with him being in the 40 percent tax bracket while his wife is in the 20 percent tax bracket. Mr Lewis told the listener: “The rules are quite interesting. You can effectively leave your ISA allowance to your spouse.
“Spouse means married or civil partner, it doesn’t mean common law partner. What happens when you do is, in practical terms, you leave them your ISA, and they get what is called an additional ISA allowance.
“Technically, what could actually happen, is you could leave the assets in your ISA to somebody different, but your spouse would still get an increased ISA allowance by the size of your ISA, which would be called their additional ISA allowance.
“Although in practice, you’re probably going to leave the assets in your ISA to your spouse, and it will just all be relatively simple.
“So what you’re concerned about is if I leave the money, will my wife suddenly have to pay tax on the money, no she wouldn’t.”
However, Mr Lewis warned the case is different if you leave your ISA savings to someone other than your spouse or civil partner. He said: “If you left it to anyone other than your wife, yes they would [have to pay tax]. The ISA would be frozen, but then after a time, once all the probate went through, it would no longer have ISA status.”
40 percent tax on ISAs
The expert added another word of warning as your ISA savings could face a 40 percent tax. He explained: “It’s worth noting that money left in an ISA is still subject to inheritance tax.
“The ISA does not exempt it from inheritance tax, so if you were due to pay inheritance tax, whether it’s in or out of an ISA, it still counts as assets for inheritance tax reasons.”
You can pass on a certain amount in total assets tax-free. Each person can pass on up to £325,000 in total assets, as well as an additional £175,000 if you are passing on your main home to a direct descendant.
A person can pass on any unused allowances to their spouse or civil partner when they die, meaning the second partner can get up to £1million in allowances when they ultimately die and pass on their estate.
