CGT on ISA subscription

[Sophie K]

Hoping someone can resolve an office debate!

Mr Smith died leaving an ISA with a probate value of £200,000, so Mrs Smith has this amount as an Additional Permitted Subscription. She choses to use her APS with the same ISA manager so an in-specie transfer is made directly from the Executor's account to Mrs Smith's ISA (for simplicity let's assume it's all invested into one fund). In the interim the value of Mr Smith's (ex-)ISA has risen to £250,000. Therefore there is a gain of £40k on the £200k transferred in specie.

Who is liable for CGT on this gain?

[pawncob]

No CGT on ISAs.It wasn't encashed it was transferred, so remained in the ISA wrapper throughout.

[Sophie K]

My understanding is that the ISA wrapper falls away on death of the investor, so surely someone has to be liable for gains from that point?

The ISA Guidance notes state:
6A.4
The ISA status of the account ceases with the death of the investor.

[pawncob]

The policy document is available, but I can't find any legislation.

Other contributors say:

"Assets will be liable to income tax and capital gains tax from the date of death to the distribution of the value at probate.

Plus, if the value of the ISA falls between the date of death and the date of distribution, there will be a shortfall between the value of assets transferred and the special ISA allowance. The surviving spouse could choose to make up the difference with additional contributions"

BUT the corollary of this means that any excess should be taxable as it will fall outside the APS. I'd leave it to the ISA provider to sort it out!!

[MichCat]

Hoping someone can resolve an office debate!

Mr Smith died leaving an ISA with a probate value of £200,000, so Mrs Smith has this amount as an Additional Permitted Subscription. She choses to use her APS with the same ISA manager so an in-specie transfer is made directly from the Executor's account to Mrs Smith's ISA (for simplicity let's assume it's all invested into one fund). In the interim the value of Mr Smith's (ex-)ISA has risen to £250,000. Therefore there is a gain of £40k on the £200k transferred in specie.

Who is liable for CGT on this gain?

Mrs Smith has the right to only £200k APS, so the ISA manager should only accept £200k of funds in-specie valued at the time the transfer is made (unless she is also using some of her annual allowance too). The excess may be sold or transferred to a normal funds account. The only gains that are taxable are those that arise on sale of the funds outside of the new ISA wrapper, being the difference between probate value and sale value.

I am no tax expert, but this is how I have understood the process from my own investigations, so please do not rely on my interpretation!

[MichCat]

Hoping someone can resolve an office debate!

Mr Smith died leaving an ISA with a probate value of £200,000, so Mrs Smith has this amount as an Additional Permitted Subscription. She choses to use her APS with the same ISA manager so an in-specie transfer is made directly from the Executor's account to Mrs Smith's ISA (for simplicity let's assume it's all invested into one fund). In the interim the value of Mr Smith's (ex-)ISA has risen to £250,000. Therefore there is a gain of £40k on the £200k transferred in specie.

Who is liable for CGT on this gain?

Mrs Smith has the right to only £200k APS, so the ISA manager should only accept £200k of funds in-specie valued at the time the transfer is made (unless she is also using some of her annual allowance too). The excess may be sold or transferred to a normal funds account. The only gains that are taxable are those that arise on sale of the funds outside of the new ISA wrapper, being the difference between probate value and sale value.

I am no tax expert, but this is how I have understood the process from my own investigations, so please do not rely on my interpretation!

Ignore the bit in red, I think I misread that somewhere!

[MichCat]

Hmmm...have now done some further research and it looks like the gain on the amount that is transferred into the ISA is also subject to CGT (I thought that being an in-specie transfer it would be excluded, like in the case of SIP transfers, but there is no specific mention of this in the CGT legislation (that I can find)).

So, any CGT due is payable by Mrs Smith. The first gain is considered realised on the proportion of funds transferred to the ISA and the other gain is when the remaining funds, which could not be transferred to the ISA, are sold.

[maths]

The advantageous tax reliefs of the ISA (now a NISA!) cease on death.

The person inheriting takes the shares in the ISA at their market values at the date of death.

On re-subscribing the shares a disposal occurs for CGT and a CGT charge arises on the difference between market value at date of death and market value on date of re-subscription.

[Sophie K]

Thanks maths, this would appear to be the logical conclusion (not to say that legislation is always logical!).