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Thousands of widows could be needlessly paying tax on money inherited from lost loved ones, as new data reveals that only a handful claim valuable reliefs on windall Isa savings.
In 2015 the Government introduced a new rule that allows bereaved spouses and civil partners to claim extra Isa allowances when their partner dies, on top of the annual allowance of £20,000.
Known as the Additional Permitted Subscription allowance (APS), this means surviving partners can place large sums of money into savings in one go, while retaining the tax-free Isa wrapper.
Around 150,000 married Isa savers die each year, according to estimates from the Tax Incentivised Savings Association, a trade body.
However just 21,000 eligible spouses – roughly one in seven – used their APS allowance in 2017-18, according to HMRC figures obtained through freedom of information requests. The number of people claiming is up from 15,000 in 2015-16, when the rules first came into force, but down on the 2016-17 tax year when 25,000 people claimed.
This means that 86pc of grieving savers could be missing out, potentially adding thousands to their income tax bills, the insurer Zurich has warned. Those who do not claim within three years from the date of death lose the entitlement.
Zurich’s Alistair Wilson said: “Despite being in its fourth year, the take-up of this tax break looks shockingly low.
“People who miss out on the allowance will be hit by a tax bill that quickly eats into the returns on their savings and slows down the growth of their nest egg.”
He added that many were simply unaware they could claim for extra protections, or found the process confusing.
Without using their APS allowance, an inheriting partner would have to gradually funnel their windfall into a new Isa each year to get the same tax breaks.
Last year the value of an average APS claim was £55,000. Placing even this modest amount into a savings account without the Isa wrapper, paying an annual rate of interest of 1pc, would add £110 pounds to your income tax bill, assuming you have already used up your £1,000 personal savings allowance.
Higher-rate taxpayers, whose savings allowance is only £500, would needlessly pay £220 on the same amount each year.
Faye Silver, of wealth manager Raymond James, said widows without an extensive knowledge of their late husband’s finances often lost out.
In some cases, large sums of money are only discovered years after death, she said.
“This is a big problem among the baby boomers who have grown up to value privacy in financial affairs, where the man of the house manages the money. This can leave widows in a precarious position, especially if they don’t know what bank accounts, investments and companies their husband may have managed.
“That’s why it’s so important to push through the taboo of death and make sure loved ones know where to find everything should you pass on,” she said.
You can apply for APS directly with your late partner’s Isa provider. Most providers will ask you to fill in a form, similar to opening an Isa.
You’ll still be entitled to the APS allowance even if your spouse or civil partner leaves the funds held in their Isas to someone else.
For example, if the value of their Isas was £45,000 and they split that between friends and family, you could still use your APS allowance to put an additional £45,000 into an Isa of your own.
harry.brennan@Finance.co.uk
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