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Inheritance ISA: allowance and tax rules

This Moneyfarm Insight blog has been created to inform you about an inheritance ISA – what it is, and how you can keep your inheritance tax-free to enable you to grow your wealth.

👐 Can I use my inheritance ISA to open an ISA account?Definitely, as long as you haven’t already used up your annual ISA allowance
🧍 Who can inherit an ISA?The account holder’s beneficiary (a spouse, partner, child, grandchild, or other relative) or beneficiary determined by the laws of intestacy
🤔 Can I inherit more than one ISA?Yes, you can have more than one inheritance ISA
💸 Can I transfer an inherited ISA to another ISA provider?Yes, you can transfer an inherited ISA to your preferred ISA provider

What is an inheritance ISA?

When we talk about an inheritance ISA, we should make it clear that it is not an actual type of ISA – it is an inheritance ISA allowance, also referred to as an “Additional Permitted Subscription” or APS for short. It applies to all forms of ISAs with leftover funds after the account holder who has a spouse or civil partner who survives them has passed away.

The inheritance ISA rules state that the surviving spouse or civil partner is entitled to receive an inheritance ISA allowance equal to the value of the ISA that the deceased held.

How does inheritance allowance work?

The Inheritance ISA allowance or APS came into effect in April 2015. If you hold an ISA and you pass away, your account will be terminated when an executor closes it or upon the completion of the administration of your estate. If both previous options do not occur, your inheritance ISA providers will terminate the account three years and one day after the date of death.

How much inheritance you are entitled to will depend on when the deceased passed away. In this respect, the ISA inheritance rules are as follows:

If the death occurred on or prior to the 5th of April 2018, the amount of your inheritance ISA allowance will equal the value of the deceased’s ISA at the time they died.

If your partner died on or after the 6th of April 2018, you can either receive the ISA inheritance allowance as per the value of the ISA at the time of the death, or you can leave the deceased’s ISA open. It will continue earning interest, and you can inherit the revised value when the account is closed. This is referred to as a “continuing ISA.”

An inherited ISA allowance is in addition to your usual annual ISA allowance, which at present is £20,000. So, if you receive an ISA inheritance or APS of £40,000, for example, you would be able to deposit £60,000 (£40,000 + £20,000) into your own ISAs during the same tax year.

A separate APS will be available for each account if the deceased held various ISAs with several companies.

Types of inheritance ISA – Cash vs Stocks and Shares and time limits

There are time limits as to when you must use any inheritance ISA allowances, and they are:

  • An inheritance ISA allowance for a Stocks and Shares ISA must be finalised within 180 days of the assets being distributed to the surviving spouse.
  • An inheritance ISA allowance for a Cash ISA must be used within 3 years of the account holder’s death or 180 days following the estate administration completion date.

The benefits of an Inheritance ISA

The benefits of receiving an Inheritance ISA allowance or APS are significant. If, before receiving the allowance, you haven’t yet been able to start saving or investing, it will give you the perfect opportunity to do so. On the other hand, if you are already saving or investing, you get a potentially big boost to your annual ISA allowance, and none of it will lose its tax-free status.

How to choose the best Inheritance ISA for you

Whether we are talking about opening a new ISA, even if you haven’t received an inheritance ISA allowance, opening one after receiving an APS is relevant. And choosing the best ISA depends on your financial circumstances, goals, and attitude towards risk.

You might, of course, choose to invest your inherited ISA sum in a SIPP. Once you’ve encashed the inheritance, you can do with it as you please. There are a couple of things you should bear in mind if you are considering a SIPP. Moneyfarm’s SIPP vs ISA article makes for an informative read.

Yes, SIPPs do have their advantages, such as the £40,000 per annum contribution allowance (to be increased to £60,000 in the 2023-24 tax year) and the ability to invest in a wide range of products. But they do have their disadvantages too. You can’t access the funds before age 55, and then you can only access 25% tax-free. Anything more than that will have to be taken into consideration as taxable income alongside your state pension and any other non-ISA income.

With that in mind, how attractive are ISA tax-free withdrawals looking now? Something well worth thinking about.

How to open an Inheritance ISA account?

As we said earlier, an Inheritance ISA is not a specific type of ISA. However, the term can be applied to all types of ISAs, including Cash, Innovative Finance, Junior, Lifetime, and Stocks and Shares ISAs.

If you inherit an ISA from a deceased spouse or partner and you don’t already have an ISA open, you can open one the same way as you would any type of ISA, which could be construed as a new inheritance ISA account.

Transferring your inheritance to an Inheritance ISA

If you receive an APS or inheritance ISA allowance and already have one or more ISA, you have a couple of options open. One is simply to start an additional ISA. The other option is to add the funds from your deceased partner’s ISA to an existing ISA, if you already have one, by initiating an ISA transfer. Your existing ISA manager will be able to help.

Investment strategies for your inheritance ISA portfolio

If you receive a substantial amount of money by way of an inheritance ISA allowance or APS, and you are undecided about what to do for best, you’ll find an article entitled “What to do with inheritance in the UK” that offers a few helpful suggestions.

Tax-efficient ISA savings or investments are always a good bet, and the pros and cons listed in the Cash vs Stocks and Shares ISA Moneyfarm blog can help you to decide what might be best for you.

A well-thought-out Inheritance ISA transfer can help to rebalance your financial situation. You can put funds into a Cash Inheritance ISA so that the money is readily available for unforeseen emergencies. Likewise, you can divert funds to a longer-term investment vehicle, like a Stocks and Shares Inheritance ISA, to act as a growing nest egg for your retirement, but with the advantage that you can access the funds tax-free at any time should the need arise.


What happens to the ISA if there are no beneficiaries named?

If the deceased ISA account holder has not named any beneficiaries in their will, under the laws of intestacy, the ISA will form part of the deceased’s estate. The estate will then be distributed according to their heirs, will or the laws of intestacy.

Can I inherit an ISA if I live outside the UK?

Yes, it is possible to inherit an ISA even if you live outside the UK. However, limitations or tax implications may occur depending on your country of residence and the type of ISA inherited. Specific rules may apply if your country of residence has a tax treaty with the UK.

If you are unsure of the best action to take, seek professional advice from a financial advisor with tax law knowledge of your country of residence and the UK.

Do I have to pay inheritance tax on my inherited ISA?

No, you do not have to pay inheritance tax on a spouse or civil partner’s ISA due to ‘spouse exemption’. Also, the ISA will continue to earn interest tax-free until the administration of the estate is completed.

However, inheritance tax is imposed if the ISA is not left to a surviving spouse or civil partner, and the amount of inheritance tax paid is dependent on the size of your estate on death.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.