Grieving spouses and civil partners can claim an extra tax-free savings allowance worth potentially thousands of pounds, using a little-known rule called the Additional Permitted Subscription (APS), according to This is Money savings expert Sylvia Morris.
Most savers know they can put up to £20,000 into an Individual Savings Account (Isa) each tax year, sheltered entirely from HM Revenue and Customs. The APS allows a bereaved spouse or civil partner to add the value of their late partner's Isa savings on top of that £20,000 limit.
The Additional Permitted Subscription has been available since April 2015, when it was introduced so that the tax-free status built up in a couple's combined Isa savings is not lost simply because one partner dies.
For example, if a partner held £50,000 across their Isas when they died, the surviving spouse can put that £50,000 into an Isa in their own name, on top of their own annual £20,000 allowance.
How to claim the allowance
To use the APS, savers must first ask each of the deceased's original Isa providers for a certificate showing how much extra allowance they are entitled to. That certificate can then be used to open a new cash Isa in the survivor's own name, either with the original provider or a different one, as long as it accepts APS subscriptions.
Not every provider does, and Morris said the information is often difficult to find on providers' websites, meaning grieving families can miss out on the allowance simply because the option is not clearly advertised.
An Isa is a UK savings or investment wrapper in which interest and returns are free of tax, up to the annual subscription limit set by the government. Both cash and stocks and shares versions exist, and the APS applies to Isa savings inherited from a spouse or civil partner.
Why sticking with the same provider can be costly
According to Morris, rates offered on dedicated APS accounts can be poor, often around half of the 4 per cent or more available on a standard easy-access cash Isa.
She said it can feel easiest, particularly soon after a bereavement, to leave the money with the original provider. But she warned this can prove a costly mistake if that provider is one of the big banks or building societies, some of which offer only lousy rates on the accounts designed to hold the extra allowance.
Building society rates compared
Among the five largest building societies, Nationwide only allows the APS to be used with its one-year Triple Access Isa, which pays 3.3 per cent and limits savers to three withdrawals a year. After that year, the money reverts to Nationwide's instant access cash Isa rate, currently just 1.1 per cent.
Skipton Building Society offers its Legacy Isa and Coventry Building Society its Additional Allowance Isa, both paying 2.05 per cent. Leeds Building Society does not accept APS subscriptions at all.
Yorkshire Building Society fares better, letting savers choose from its easy-access and fixed-rate Isas, including an Easy Access Isa paying 3.6 per cent and a one-year fixed-rate Isa at 4.4 per cent.
What the big banks pay
Lloyds, Halifax, Santander, HSBC, NatWest and Barclays all accept APS subscriptions into their easy-access accounts, though the rates on offer vary widely.
The worst rate is 0.75 per cent, offered on Lloyds' Cash Isa Saver, while the best is 3 per cent from HSBC's Loyalty Cash Isa, which requires the saver to also hold an HSBC current account. Morris said Barclays and NatWest are worth considering for savers who prefer a fixed-rate Isa instead.
Better deals available elsewhere
Savers are not obliged to use their original provider or a big high street bank. The best eligible easy-access deals identified elsewhere include the app-based Trading 212, paying 4.61 per cent for the first year, and Virgin Money's Double Take E Isa at 4.15 per cent, which allows two withdrawals a year. National Savings & Investments' Direct Isa pays 3.8 per cent.
Once opened, an Isa funded through the APS becomes an ordinary cash Isa, and savers can transfer it between providers in the usual way if they later find a better rate.
Checking for the best rate
Morris said that whatever type of account someone chooses, checking the top rates regularly and switching to a better deal is essential, as is using a cash Isa to shelter savings from tax. This is Money's best buy savings tables are independently compiled by Morris and the This is Money team, are updated daily, and feature only accounts protected by the Financial Services Compensation Scheme (FSCS), which covers deposits up to £85,000 per person per institution.
