The tax benefits of an ISA are widely known. When placed inside an ISA wrapper, your money can grow free of tax—income tax, capital gains tax, and dividend tax

What many people don’t realise is that Isa tax breaks keep on giving after you’re gone. A spouse or civil partner can receive a one-off Isa allowance equal to the total value of your Isas when you die.  You need to know who can inherit what and how your hard-earned savings can be passed on to your loved ones

NMTBP investigates all things concerning ISA inheritance rules, allowances, Inheritance Tax and more

What happens to an ISA after death? 

When you die, your ISA won’t automatically close. Instead, it will become a ‘continuing ISA’. It’ll stay tax-efficient and benefit from any growth through cash interest rates or investments. But you can’t add more money to the account

Your ISA will close when:

• the administration of your estate is complete or,
• the executor of your will closes the account

Who can inherit an ISA? 

A spouse, civil partner, or anybody named as a beneficiary to an estate can inherit the value of an ISA in cash. Nobody can inherit the ISA account itself after death. The ISA inheritance rules allow a spouse or civil partner to automatically inherit the tax-free value of your ISA after you die, unless you have selected a different beneficiary in your will.

You can inherit any type of ISA except a Junior ISA. This includes:

• Cash ISA
• Stocks and Shares ISA
• Lifetime ISA
• Innovative Finance ISA

A child can inherit the value of an ISA – but not the tax wrapper itself. Instead, the money forms part of the estate and may be subject to inheritance tax

ISA inheritance allowance 

An inherited ISA allowance is called the Additional Permitted Subscription (APS). The APS is an increased one-off allowance. This allowance is on top of a spouse or civil partner’s annual allowance (£20,000 for the 2023/24 tax year)

Example 

Your deceased spouse or civil partner’s ISA was worth £40,000 and they have left that money to you. This becomes your Additional Permitted Subscription. Your annual allowance would rise from £20,000 to £60,000 for a single year while the money transfers to your account. After you have used the APS, your allowance would revert to the usual £20,000 for the following tax year

What happens if my spouse or civil partner leaves their ISA funds to someone other than me?

You’ll still be entitled to an APS allowance because it’s calculated on the amount your spouse has built up in tax-free entitlements, regardless of whether or not you’ve inherited their savings (ISA funds).  This is vitally important because even if your spouse or civil partner has left their FUND to someone else, their ALLOWANCE passes to you. You won’t have the money from their ISA, but, because you have the allowance, you can fund that separately tax free.

Inheriting an ISA from a parent 

If your children are named as your beneficiaries, then they will receive the value of your ISA in cash. This applies to anyone except your spouse or civil partner who inherit the value into their own ISA

ISAs and Inheritance Tax 

ISAs can shield your money from several kinds of tax; dividend tax, income tax, and capital gains tax. Whether an ISA will be subject to inheritance tax (IHT) depends in part on who the beneficiary is.

• If you’re inheriting your deceased spouse or civil partner’s ISA, you won’t have to pay inheritance tax
• If you inherit an ISA and aren’t the spouse or civil partner of the deceased, then you’ll pay IHT

The current tax-free threshold on the whole estate value is £325,000. So anything above that amount will usually have 40% IHT applied.

AIM Shares and Inheritance Tax 

If you have invested in the Alternative Investment Market (AIM) with your ISA, the value of those investments may not be subject to inheritance tax. Certain AIM shares qualify for Business Property Relief.  After being held for two years, the value of any qualifying AIM shares in your ISA will be excluded from your inheritance tax calculation

Investing in these eligible AIM shares via an ISA means that your inheritors can receive 100% of their value