It is said there are two certain things in this world – death and taxes. But whereas we are still waiting for the elixir of eternal life, ISA inheritance tax can be minimised under certain circumstances.
This Moneyfarm guide to the ISA Inheritance Tax rules (or ISA IHT rules for short) tells you all you need to know. With this knowledge, you can protect your assets and maximise your wealth for future generations.
| What happens to an ISA when someone dies? | The ISA will be paid to the surviving spouse / civil partner or transferred to the deceased estate. |
| What are the tax implications of inheriting an ISA? | Taxes will depend on the type of ISA it is and the value of the estate. |
| Can I inherit someone else’s ISA? | Definitely, you can inherit someone else’s ISA. |
| What if I have more questions about ISA inheritance tax? | You should contact a financial advisor. |
Are ISAs exempt from inheritance tax?
They can be. It all depends on who your beneficiaries are and what rules your ISA providers have laid down.
According to the ISA rules on death, HMRC advises that if you have a surviving spouse or civil partner, they will receive an additional permitted subscription, or APS for short. This is sometimes referred to as an inheritance ISA.
In essence, an APS is an ISA allowance. It entitles your spouse or civil partner to receive an amount of money corresponding to the sum held in your ISA, tax-free. That money in these additional ISAs can then be added to your partner’s or spouse’s ISA, or if they do not have one, can be used to start a new ISA.
An APS does not affect your partner’s or spouse’s annual ISA allowance. It is in addition to it.
As far as any other type of beneficiary is concerned, IHT on ISAs comes into play according to the size of your estate and the beneficiaries’ circumstances.
Can I leave my ISA to my daughter?
As ISA cannot be transferred to anyone while you are still alive. However, your daughter or child could inherit the value of some or all of the ISA as part of your estate through your will. IHT ISA rules concerning tax on an ISA after death will apply.
How is ISA income taxed after death?
All types of ISAs can be inherited or transferred after the account holder has died. Usually, because ISAs are tax wrappers, there won’t be any income tax or capital gains tax to be paid up to the date of your death. But after that date, the assets held within an ISA will form part of your estate, meaning that ISA inheritance tax rules will be brought to bear.
If we’re talking about a Junior ISA, any money in the account when the child has passed away can be transferred to the contributors or the beneficiaries of the child’s estate.
Usually, the money goes to the parents of the child, but it could also go to the child’s spouse or civil partner if the relationship was legally formed when the child was over 16. However, a new law came into effect on the 27th of February, 2023, changing the minimum age to 18. If you are in any doubt about the age limit or the APS or you have any other concerns regarding the Junior ISA inheritance tax situation, you should contact HMRC.
Cash ISA inheritance tax follows the same rules as all other ISAs.
ISAs and inheritance tax thresholds
ISA and IHT depend on the size of your estate. The threshold for inheritance tax, including IHT on an ISA, is £325,000. Below this sum, the rate of inheritance tax (IHT) is zero. In other words, you can inherit up to this amount tax-free.
If you bequeath your home to your kids (including adopted, foster or stepchildren) or grandkids, the tax-free threshold for inheritance tax purposes increases by £175,00 to £500,000.
Individual Savings Account Inheritance Timeframes
After death, any ISA or ISAs you hold will end either when the executor of your will closes it (them) or when probate is complete. If neither of these things happens, then the provider(s) of your ISA(s) will close it (them) 3 years and 1 day from the date you died.
What happens with stocks and shares ISAs
If you have a stocks and shares ISA, after your death, the provider can be instructed to do one of two things. They can be instructed to sell the investments and transfer the proceeds to the administrator or a beneficiary of your estate. Alternatively, they can be instructed to transfer the investments to an ISA held by your spouse or civil partner.
What happens if you inherit an ISA?
If you are a beneficiary, the only way of avoiding ISA inheritance tax is if you are the deceased’s spouse or civil partner. You will then have access to an APS under which you will not be liable for inheritance tax.
In all other instances, there can be no ISA inheritance tax exemption unless the size of the value of the state is less than £325,00 or £500,000 if a home is being passed onto the deceased’s children or grandchildren.
Investing your inheritance
Having paid ISA inheritance tax where appropriate, you can use the balance of the money to boost your own savings. You can do with it as you please, but boosting your retirement savings could be a good option.
There are many ways on how to invest your inheritance. For instance, you could put the funds into a private pension or an ISA. Are ISAs tax-free? Yes, they are. Providing you stay within your £20,000 annual ISA allowance, your investment will be income, capital gains and dividend tax-free.
The best ISA for any inheritance you receive depends on the goals your financial planning has been set to achieve. But don’t forget that one day, your ISA could be subject to inheritance tax unless it holds AIM stocks.
You don’t get many opportunities for tax-free investments in the UK, so it makes sense to use something like a stocks and shares ISA to exempt you from tax on savings in the UK where you can. However, you should never lose sight of the fact that the value of investments can go down as well as up.
FAQ
What happens if the deceased had multiple ISAs?
If the deceased had multiple ISA accounts will depend on if the deceased was married or has a civil partner and the type of ISA. For instance, Junior ISAs have no APS allowance provision. If the deceased had multiple ISAs with different providers, the spouse or civil partner will receive a separate APS allowance from each ISA provider. If the multiple ISAs are with the same provider, the APS allowance is valued based on the sum of all the ISA accounts.
If the deceased does not have a spouse or civil partner, each ISA will form part of the deceased real estate. If the total value of the ISAs exceeds the inheritance tax threshold, then the value of the ISAs that are subject to inheritance tax will be taxed at 40%.
How is the APS allowance calculated?
APS allowances are available for deaths occurring on or after December 3, 2014. The APS allowance is equal to the value of the ISA on the date of death if the deceased passed away between 3 December 2014 and 5 April 2018. The deceased’s ISA would become a “continuing ISA” if they passed away on or after April 6, 2018, and would remain in that status until the earliest completion of the administration of the estate, 3rd anniversary of the date of death, or closure of the ISA due to all the funds being withdrawn.
How often can I transfer the APS allowance?
An APS allowance can only be transferred one time into the spouse or civil partner’s ISA account. Once the APS allowance has been transferred, the inheritor can do whatever they want with it (sell, switch or transfer it out).
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
