Association of Accounting Technicians response to Individual Savings Accounts: transfer of benefits to surviving spouses or civil partner upon death

Transcription

1 Association of Accounting Technicians response to Individual Savings Accounts: transfer of benefits to surviving spouses or civil partner upon death 1

2 Association of Accounting Technicians response to Individual Savings Accounts: transfer of benefits to surviving spouses or civil partner upon death 1. Introduction 1.1. The Association of Accounting Technicians (AAT) is pleased to have the opportunity to respond to the HMRC: policy paper on Individual Savings Accounts: transfer of benefits to surviving spouse or civil partner upon death published on the 20 January 2015; the proposed Draft legislation: Individual Savings Account (Amendment) Regulations 2015 published on the 20 January We are submitting this response on behalf of our membership and from the wider public benefit of achieving sound and effective administration of taxes We have added comment where we feel we can add value or highlight aspects we believe need to be considered further. We have focussed on the operational elements of the proposals and have provided opinion on the practicalities in implementing the measures outlined. 2. Executive summary 2.1. In principle, AAT welcomes these proposed ISA changes that should ensure the continuation of the protection of a family s savings to all the tax advantages that can be enjoyed inside an ISA wrapper following the death of a spouse, which is reasonable because: It acknowledged that most households save together and encourage people to save for their retirement. The tax foregone is of relatively small amounts AAT has a some questions regarding the operational practice of the proposals and these are outlined in section 3 below. 3. AAT response to the consultation paper on Individual Savings Accounts: transfer of benefits to surviving spouses or civil partner upon death The following paragraphs outline AAT s response to the proposals outlined in the consultation paper In the Autumn Statement 2014 the Chancellor announced: At the moment, when someone dies, the savings in their ISA lose their tax-free status and their spouse starts paying tax on that money. From today, I can announce that when someone dies, their husband or wife will be able to inherit their ISA and keep its tax-free status." 1 1 Chancellor George Osborne's Autumn Statement 2014 speech 2

3 3.3. In principle, AAT welcomes these proposed ISA changes that should ensure the continuation of the protection of a family s savings to all the tax advantages that can be enjoyed inside an ISA wrapper following the death of a spouse, which is reasonable because: It acknowledged that most households save together and encourage people to save for their retirement. The tax foregone is of relatively small amounts Under these proposals, it is intended the surviving spouse will receive an additional ISA allowance equal to the amount in their deceased partner's ISA at the date of their death, allowing them to make further investments up to this value in their own name together with their own individual ISA allowance Creating effective legislation incorporating the necessary amendments to the existing ISA regulations in support of government policy will however be challenging, particularly in light of the different types of holdings held in the deceased ISA plan and the tax treatment of these holdings immediately following the death of the spouse, resulting in these holdings under current practice losing their ISA tax status and so effectively becoming unwrapped at this point to then be transferred and regain their ISA status For an inherited ISA holding non cash assets, such as; a portfolio of collective investments, Open-Ended Investment Companies (OEIC s), stocks and shares and alternative investment market stocks (AIM) should all be able to be disinvested or reinvested as part of this additional ISA subscription allowance AAT is pleased to see contained within the TIIN issued on 20 January 2015 under the heading proposed revisions on page 2 the option to allow individuals to transfer to their own ISA certain non cash assets previously held by their spouse or civil partner. AAT is aware 2 the Treasury has said it wants to allow in species smooth transfers to avoid savers having to sell and repurchases assets from their spouse's ISA, but could not find any further commentary on this point within these consultation documents 3.8. AAT understands that any growth made while the deceased's assets were 'unwrapped' - i.e. from the point of death until they are put into the spouses ISA using this additional allowance will in this interim period be subject to the normal rates of capital gains tax (CGT) on any gains made and income tax on any interest or dividends income generated. AAT believes that many taxpayers will currently be unaware of this situation due to the distraction of the headline statement made in the autumn statement of an inherited ISA keeping its tax free status. Therefore the current proposals are not actually operating as a true ISA transfer with all the tax advantaged benefits associated with an ISA, but merely for the earmarking of access rights to an agreed ISA one off allowance for future ISA subscriptions subject to being completed within a stipulated time period During this time for administrative and compliance purposes these holdings would have gone from an ISA wrapper, then effectively unwrapped, by the existing ISA plan manager for taxation purposes, only to then be put back into an ISA wrapper. AAT would suggest that for simplicity and to avoid the needless creation of additional administration and compliance work for both the ISA plan manager and the plan holder that measures are introduced to allow for the ISA wrapper to be maintained throughout this transfer period and for a simple re-designation of an ISA account to be introduced AAT assumes that for ease of operation, the proposed reassignment of the deceased ISA account by the existing ISA manager to the surviving spouse was viewed, in the drafting of these amendment regulations, as the simplest and thus preferred method of operation as indicated on page 2 of the draft ISA (Amendment) Regulations 2015 under ISA regulation 5DDA (2)(c). 2 CityWire Money, 10 Dec 2014, Government set to remove hurdle to ISA inheritance changes 3

4 3.11. This regulation also contains the condition that this is subject to paragraph (7) as shown on page 3 of these regulations which would indicate that where the Board authorises an account manager it would be possible for a different account manager to be used for these ISA subscriptions AAT would trust that the process for gaining approval from the Board to use a different ISA plan manager would be relatively straightforward for normal routine cases. If the process for gaining approval from the Board is intended to be restrictive and for one-off cases, then it would be AAT s consideration that this is unfair and not in the best interests of taxpayers because: The surviving spouse is likely to want to use their own ISA plan manager rather than the deceased s ISA plan manager. Depending on the investment profile and attitude to risk of the spouse this could impact on the range and choice of investment options that are available due to any restrictions placed on them by the deceased s ISA plan manager. This would mean the deceased s ISA plan manager will be required in the first instance to take charge of the spouse s ISA subscriptions in preference to another favoured ISA manager. This would then require a further transfer to be completed once these additional ISA subscriptions have been finalised in order to secure the desired outcome AAT awaits clarification on this point and the release of the updated HMRC Guidance Notes for ISA managers dealing with these operational issues, providing further information on how this will operate and the process to be used for gaining approval from the Board for authorisation for cases where a different ISA plan manager was preferred to that of the deceased ISA plan manager ISA regulation 5DDA (5)(a) on page 3 of the draft ISA (Amendment) Regulations 2015 sets out the permitted time period for subscriptions of non-cash assets. AAT is unclear how the 180 day period was established for this It may be possible for an executor to wind up a straightforward estate in a relatively short period of time, inevitably some estates will be more complicated and may need much longer than the 180 days proposed Therefore, AAT would recommend that a period of up to two years from date of death would be more suitable and should be included under these provisions which would also coincide with a deed of variation time limit Similarly under 5DDA (5)(b) this would seem to acknowledge this fact but AAT is unclear as to why it has been decided to create such a wide difference in allowable time periods on the basis of the type of underlying assets held AAT recommends that a further review of the wording used for the conditions contained under 5DDA(5)(a) and (b) and 5DFA(1)(d)(i) and (ii) are considered in order to maintain consistency between the expressions and terms used for these two very similar regulation clauses Following changes in the type of permitted investment classes that can be held in an ISA in August 2013, the government allowed shares in companies listed on the alternative investment market (AIM) and other alternatively listed shares to be held in ISA s. Given that AIM-listed companies may qualify for business property relief (BPR), those investments could then be 100% exempt from inheritance tax (IHT), by the condition that the investor must have held these shares for at least two years. Therefore AAT asks for further clarification in respect of the future IHT tax treatment for these non-cash assets held in the deceased s ISA that are to be transferred under these new ISA transfer rules to the deceased s spouse s ISA account which were qualifying alternative investment market (AIM) stocks for business property relief purposes (BPR) and would have otherwise been 4

5 treated as IHT exempt should these have been held for a period of over two years at the date of death AAT notes the new ISA rules do not provide any additional inheritance tax benefits (IHT). They just entitle the survivor to an increased ISA allowance for a limited period after death. The actual ISA assets will be distributed in line with the terms of the Will (or the intestacy rules) and remain within the estate for IHT Where they pass to the spouse or civil partner, they will be covered by the spousal exemption. However ultimately these combined ISA funds may be subject to 40% IHT on the second death unless these holdings were AIM stocks qualifying for 100% BPR AAT would recommend that any qualifying AIM stocks held for a period of two years at the date of death should be treated as inherited business property and so would immediately qualify for BPR in the hands of the surviving spouse and remain so within the newly designated ISA account subject to the AIM stocks continuing to qualify under this category For other AIM stocks held under the two years BPR qualifying period at the date of death HMRC will need to clarify that the time period for this exemption will date from the point of purchase of the AIM stocks rather than the date of inheritance/transfer of the AIM stocks to the spouses ISA. AAT believes that further technical guidance will be needed in respect of the operation of these points as it would seem most unfair for the taxpayer if the time already elapsed holding these AIM stocks by their deceased partner and the exemptions they will qualify for cannot be fully considered in the hands of the inheriting spouses ISA plan AAT seeks further clarification in respect of the proposed operation of ISA regulation 5DD(f)(iv) involving the transfer of non-cash assets, pending publication of an updated ISA managers guide dealing with this. Under point (f)(iv) this set out the requirement for any non-cash assets to have remained within the control of the deceased s ISA account manager. For cases where a new account manager is approved by the Board under 5DDA(7) this would satisfy the condition of 5DDA(2)(c) allowing the transfer of the assets to the new ISA plan manager. However, this would also raise the question if the correct order of events are not complied with during the administration period on an estate by the deceased s personal representatives, their actions unknowingly could disallow the eligibility of the inheriting spouse to complete an in species transfer into a new ISA plan with either the existing plan manager, or Board approved, plan manager Should the personal representatives elect to have these assets released in species firstly to themselves, before passing to the spouse which would change the title to these assets and so disallowing their eligibility To avoid this situation from occurring AAT would recommend that some form of election will need to be completed by both the personal representatives and the inheriting spouse, notifying an ISA manager of their intention to complete an in species ISA transfer and for this to be directly transferred in to a new ISA plan to ensure the assets remain under the control of the existing/approved plan manager AAT notes that the current operation of ISA regulation 11 3, would allow for non-uk resident individuals to hold an ISA investment in the UK if these individuals had held an ISA from before they became non-resident thus satisfying the conditions of ISA regulation 10(2)(d) at the time. Once then becoming non-resident they would be able to retain the benefits of the ISA account subsisting at the time, but would not be entitled to make any further ISA subscriptions, due to becoming non-resident The proposed amendments contained under 5DDA (1)(a) for subscriptions to an ISA which are subject to paragraph (2) for the circumstances to apply for the subscription to apply will in their current form seem to permit non-uk residents to transfer a deceased s partner s 3 (see page 46) 5

6 ISA assets to invest in a UK ISA, which would have been prohibited under the previous legislation. AAT seeks further clarification if this was the intended outcome in the drafting of these amended ISA regulations On a technical point under 5DDA (2)(e) it states that S and the deceased were living together at the date of the deceased death and referenced at the bottom of page two in the draft ISA (Amendment) Regulations 2015 in the footnote (a) section 1011 of the Income tax Act 2007(c3) for the definition of this for income tax purposes. For completeness we would read this under the accepted practice of interpretation: If a couple live apart but the marriage has not broken down, then this would count as living together for both income tax and capital gains tax purposes Finally, AAT would ask the government to further consider the position in light of ISA rules and pension rules getting ever closer, especially following recent pension death benefit changes which could now result in a number of ISA investors not even considering whether to take up this additional ISA allowance, if the same amount could be paid into their pension/ self-invested personal pension (SIPP) to achieve the same tax free investment returns as the ISA and also provide the same access to capital for investors over 55 years of age. This would also coincide with age profile findings from the impact assessment for the group most likely to benefit from these ISA changes. The added benefit is that the pension option would be free of IHT and potentially tax free in the hands of the beneficiaries should death occur before the age of AAT believes that some realignment for IHT purposes should also be considered for the transferability of ISA funds on death to be free of IHT, and the AAT would be pleased to take part in these future discussions. 4. Conclusion As previously stated, AAT welcomes the proposed ISA changes in principle as they should ensure the continuation of the protection of a family s savings to all the tax advantages that can be enjoyed inside an ISA wrapper following the death of a spouse. However, AAT has made a number of recommendations as to the operational practice of the proposals and is seeking clarification for some areas. 5. About AAT 5.1. AAT is a professional accountancy body with over 49,800 full and fellow members and 83,700 student and affiliate members worldwide. Of the full and fellow members, there are over 4,100 Members in Practice who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types (figures correct as at 31 December 2014) AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law Thank you for the opportunity to respond to the consultation on Individual Savings Accounts: transfer of benefits to surviving spouses or civil partner upon death. 4 HMRC Helpsheet 281 6

7 6. Further information If you have any questions or would like to discuss any of the points in more detail then please contact AAT at: and telephone: Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY 7