The obscure rule that lets savers bust their ISA allowance | Personal Finance | Finance

Few savers may be aware of a powerful rule in the ISA system that can boost their tax-free savings after the loss of a partner – and it’s perfectly legal.

The Additional Permitted Subscription (APS) is an inheritance loophole that lets bereaved spouses or civil partners increase their Individual Savings Account (ISA) allowance far beyond the regular £20,000 annual limit. In some cases, the tax-free allowance can soar by tens of thousands of pounds, offering real relief amid financial worries after bereavement. Sarah Coles from Hargreaves Lansdown said: “These inherited allowances aren’t always well understood, but can be incredibly valuable – potentially protecting tens of thousands of pounds from tax.”

How does APS work?

When someone with an ISA dies, their accounts become what’s known as “continuing ISAs,” accruing growth or interest for up to three years.

Under the APS rules, the surviving spouse or civil partner inherits an extra tax-free ISA allowance equal to the value of their late partner’s ISAs at death.

This one-off boost is in addition to their own annual £20,000 ISA limit, meaning their allowance for the year could soar to £30,000, £50,000, or even six figures, depending on how much their partner holds in ISAs.

For example, if your partner had £60,000 in ISAs, you’d qualify for an extra £60,000 tax-free allowance, on top of your own £20,000 limit.

You can apply this APS to a new or existing ISA in your name, and you do not need to inherit the ISA assets to be able to claim. You inherit the allowance, even if those assets go to someone else.

To be eligible, you must have been legally married or in a civil partnership and living together at the time of death. Claims must be made within three years of your partner’s death, or 180 days following completion of their estate administration, whichever is later.

The death must be registered with your partner’s ISA provider, and you’ll need evidence of your relationship and cohabitation at the time of death. The APS can only be made to the ISA manager, who will ultimately hold your funds, so selecting your provider carefully is crucial.

Not every ISA provider supports APS, so check this point first to avoid complications.

Investments in stocks and shares ISAs can be transferred, provided this is done within 180 days of the assets being distributed.

Investment platform Hargreaves Lansdown has seen a surge in people using APS to lock in the tax perks. Its data shows a one-third increase in APS claims in the last tax year compared to the previous one and a two-thirds rise compared to 2022-23.

However, financial advisers warn that the APS process can be slow and paperwork-heavy, so acting sooner rather than later is key.