What happens to an ISA on death?

Dealing with the loss of a loved one is emotionally challenging, and handling the administrative side of their estate can often feel overwhelming. If you are dealing with a deceased person’s finances, you may be wondering what happens to their savings.

A common question we encounter is: Can you inherit an ISA?

The short answer is yes, but the rules differ significantly depending on whether you are the spouse/civil partner of the deceased or another beneficiary (such as a child or friend). Furthermore, while the money can be inherited, the tax-free status of that money functions differently upon death.

This guide explains everything you need to know about inheriting an ISA, the Additional Permitted Subscription (APS), and the tax implications for the 2025/26 tax year.

What happens to an ISA when someone dies?

Contrary to popular belief, an ISA does not close immediately upon death. Instead, it becomes a ‘continuing account of a deceased investor’.

This means that the money held within the ISA (whether Cash, Stocks & Shares, or Innovative Finance) continues to benefit from tax-free status. Any interest earned or investment growth remains free from Income Tax and Capital Gains Tax during this period.

The ISA will remain open as a continuing account until one of the following happens:

• The administration of the estate is completed.
• The executor closes the account.
• Three years and one day have passed since the date of death.

Once the account is closed, the funds form part of the deceased’s estate and are distributed according to the will (or the rules of intestacy if there is no will).

Inheriting an ISA as a Spouse or Civil Partner

If your husband, wife, or civil partner has passed away, you are entitled to a specific tax benefit known as the Additional Permitted Subscription (APS).

What is the Additional Permitted Subscription (APS)?

It is crucial to understand that the APS is an inheritance of allowance, not necessarily the money itself.

Even if the funds in the ISA are left to someone else in the will (for example, the children), the surviving spouse is still entitled to the APS allowance. This allows you to boost your own tax-free savings limit for the year.

• Standard Allowance: For the 2025/26 tax year, every adult has an ISA allowance of £20,000.
• APS Allowance: This is added on top of your £20,000 allowance. It is equal to the value of the deceased’s ISA at the time of their death (or the value when the account is closed, whichever is higher, for deaths occurring after April 6, 2018).

Example of how APS works

Let’s say your partner passed away with £45,000 in their ISA.

1. Your Standard Allowance: £20,000
2. Your APS Allowance: £45,000
3. Your Total Tax-Free Allowance: £65,000 for that tax year.

This means you can save or invest up to £65,000 into your own ISA without paying tax on the interest or gains. You can fund this using the money inherited from your partner or your own personal savings.

How to claim the APS

You usually need to apply for the APS through the deceased partner’s ISA provider. However, you are often able to transfer this allowance to a provider of your choice.

• Time Limits: You typically have three years from the date of death (or 180 days after the estate administration is complete) to use this allowance.
• In-Specie Transfers: If you inherit Stocks and Shares, you may be able to transfer the investments directly into your own ISA without selling them (known as an ‘in-specie’ transfer), provided you use the same provider.

Inheriting an ISA as a Non-Spouse (Children, Relatives, Friends)

The rules are different if you are inheriting an ISA from a parent, grandparent, or friend. The Additional Permitted Subscription does not apply to you.

Here is what you need to know:

1. Loss of Tax Wrapper: Once the ISA is closed and the funds are paid out to you, the money loses its ISA status. It is treated as normal cash.
2. Future Tax: If you invest this money or put it into a savings account, any future interest or dividends will be subject to standard Income Tax or Capital Gains Tax rules.
3. Using Your Own Allowance: To protect this money from future tax, you would need to pay it into your own ISA, subject to your annual £20,000 limit.

Is there Inheritance Tax (IHT) on ISAs?

This is a common point of confusion. While ISAs are free from Income Tax and Capital Gains Tax, they are not free from Inheritance Tax.

The money held in an ISA forms part of the deceased’s total estate.

• Spousal Exemption: If the ISA assets are left to a spouse or civil partner, they are generally exempt from Inheritance Tax, regardless of the value.
• Other Beneficiaries: If the ISA is left to anyone else (children, siblings, etc.), the value of the ISA is added to the total value of the estate. If the total estate exceeds the Inheritance Tax threshold (currently £325,000, or up to £500,000 if including a main residence left to direct descendants), tax may be due at a rate of 40% on the amount above the threshold.

I’ve received an inheritance – how should I invest it?

If you’ve received a significant inheritance via an ISA on death of the holder or via some other medium and you would like to make it work for you in the most beneficial way, the best thing to do is to seek professional investment advice.

Knowing how to invest your inheritance and take advantage of the tax benefits open to you is key. For example, you can optimise both your annual ISA and pension allowances and use the remaining balance to open a general investment account.

Finding out the answer to the question of “What happens to an ISA when someone dies, can help you with making decisions about what to do with any inheritance you, yourself, might receive. Forewarned is, as they say, forearmed.

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