Martin Lewis has explained a little-known ISA rule that can increase your ISA allowance. He spelled out the specifics of the "special rule", saying you will need to contact your ISA provider to claim the provision.
Speaking on his BBC podcast, the consumer expert explained the key rules to understand about how inheritance tax applies to your ISA savings. While all your ISA growth is tax-free, Mr Lewis warned that "when you pass an ISA on when you die, it is part of your estate". This means your ISA savings are liable for inheritance tax, a 40 per cent levy that applies to the value of your total assets, above certain allowances.
'Special rule' for spouses and civil partners
But there is a way to pass on a tax-free allowance to your surviving partner. Mr Lewis told listeners: "There is a special rule for your spouse or civil partner—so your married or civil partner, not cohabiting, not your kids—that they can get an extra ISA allowance of the same as your allowance when you died."
This entitlement is known as the Additional Permitted Subscription (APS). The idea is the surviving person gets an extra ISA allowance in line with the value of the ISA holdings the deceased had at the time of their death.
Mr Lewis explained: "So if you've got £50,000 in ISAs, they can get an extra £50,000 tax-free ISA allowance." While your standard ISA allowance only lasts a year and refreshes at the start of the tax year, with the APS you have a much longer timeframe to use it.
Timeframe and provider rules
You can use it up to three years from the date of the death, or 180 days after the administration of the estate is completed. This is the same timeframe within which the deceased's ISA holdings retain their tax-free allowance, while the estate is being sorted out.
The money expert went on to explain how you claim the APS: "They [the surviving partner] can apply for it, but it's worth noting you have to apply to your ISA provider to get it, and not all ISA providers will allow you to have it."
Fortunately, if your current provider does not allow you to apply for the APS, you can transfer your ISAs to a provider which does. Mr Lewis explained another aspect of this extra allowance that's worth known about: "And interestingly, I could give my child the money [from the deceased person's ISAs], but I could still pass the allowance on to my spouse."
ISA changes from April 2027
Some important changes to ISA allowances are coming in from April 2027:
- Currently you can deposit up to £20,000 a year into ISAs, and you can divide this however you want between the different types of ISAs
- From next year, you will only be able to use £12,000 however you choose. The other £8,000 will only be available for deposits into investment-based ISAs, like stocks and shares ISAs
- People aged 65 and over will be exempt from these changes and will retain the current £20,000 allowance
