People inheriting their spouses' Isa savings in the wake of changes outlined in the chancellor's Autumn Statement could be in line for a surprise tax hit, despite George Osborne's promise that Isas will be able to be handed over 'tax free' from April 2015.
While Isas passed to the survivor on the death of a spouse will be exempt from inheritance tax, the assets will be 'unwrapped', meaning they will no longer be tax sheltered and will instead simply exist as taxable stocks and shares investments.
Under Osborne's proposals, the surviving spouse will receive an additional Isa allowance equal to the amount in their deceased partner's Isa, allowing them to 'rewrap' the investments in their own name.
So for example if a husband dies with £50,000 in his Isa and it passes to his widow, she will then get her existing Isa allowance for the year - £15,240 from April - as well as a one-off additional allowance of £50,000, giving a total of £65,240.
This will allow her to put the unwrapped assets back into an Isa wrapper and begin to enjoy the tax benefits coming from that.
However, Rachael Griffin, head of technical marketing at Old Mutual Wealth, told Money Observer that any growth made while the deceased's assets were 'unwrapped' - i.e. from the point of death until they are put into the partner's Isa using their expanded allowance - will be subject to normal rates of capital gains and income tax.
'With this bunch of [inherited] collectives, you can cash them in or reinvest them into this additional Isa allowance. In between they have gone from an Isa wrapper and been effectively unwrapped, and then put back into an Isa.
'Wouldn't it be better if they maintained that Isa wrapper the whole time?'
Griffin says Old Mutual Wealth will be lobbying the government to allow a deceased person's Isa savings to remain wrapped under the Isa banner, simply transferring from one name to another and thereby avoiding the tax hit that could come in between.
A spokesperson for HM Revenue and Customs told Money Observer that the time limit on this additional allowance has not yet been decided.
The spokesperson says: 'The announcement ensures that Isas are fair to married couples and civil partnerships. Some couples save jointly throughout their lives.
'When an Isa holder dies, savings become taxable and a surviving spouse or partner can [currently] only put them back into an Isa by using their own subscription limit.
'After April, if an Isa holder dies they will be allowed to invest as much in their own Isa as their deceased partner used to have, in addition to the surviving spouse's own Isa limit.'