George Osborne has revealed the proposed rule change, which will apply from April, as part of the Autumn Statement this afternoon. He also announced the Government will increase the ISA limit from £15,000 to £15,240 in April.
He said his Autumn Statement was all about supporting saving, reiterating changes he has already unveiled on freedom and choice in pensions earlier this year. Many pensions changes will come into effect in April.
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He confirmed details of the already announced abolition of the death tax on pensions.
He said: "We will trust people with control over their own pensions. I can confirm that the death tax will be abolished and people will be able to pass on their pensions to their loved ones tax free.
"We are delivering fairness for savers and those who aspire to work. When someone dies their husband or wife will be able to inherit their ISAs and keep its tax free status."
The Treasury summarised the change by releasing this statement: "Currently, if someone passes away they can’t pass on their ISA to their spouse, even if they have saved the money together. 150,000 people a year lose out on the tax advantages of their partner’s ISA when their partner passes away.
"From 3 December 2014, if an ISA holder dies, they will be able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance which they will be able to use from 6 April 2015.
"The surviving spouse or civil partner will be allowed to invest as much into their own ISA as their spouse used to have, in addition to their normal annual ISA limit."
Next year, the tax-free personal allowance, which was set to rise to £10,500, will rise instead to £10,600, the Government also announced. The higher rate threshold will also rise to £42,385.
On the banking sector, Mr Osborne said: "I am taking action today to make sure our banks pay their fair share too. I am limiting the amount of profit in banks that can be offset by losses carried forward to 50% and delaying relief on bad debts."
Stamp duty will be reformed, Mr Osborne told MPs, with stamp duty cut for the 98% of homebuyers who pay it.
He said: "I'm announcing a complete reform of a tax that has been described as one of our worst-designed and most damaging of all taxes."
A full review of the structure of business rates was also announced to make them fairer.
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