Are ISA’s subject to Inheritance Tax?

An ISA or Individual Savings Account allows UK residents to deposit up to £20,000 per year in a tax-sheltered account.

What is an ISA?

The account can be either cash or stocks and shares. The primary benefit of investing within an ISA is that income and gains whilst sheltered by the ISA are not subject to UK tax.

Although being one of the most tax-effective methods of investing during your lifetime, ISA’s have different tax implications on death.

What happens on death?

On death, Inheritance tax (IHT) becomes payable. IHT is calculated based on the value of the deceased estate at the date of death.

The estate includes land and property, shares, bank balances and any other assets that were held by the individual. If the assets of the individual’s estate exceed their nil rate band (this is currently £325,000), tax will be payable.

Exemptions from IHT

Any amounts left to your spouse is free from IHT. In addition, if you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. The current IHT rate is 40% and is charged on the value of an individual’s estate that surpasses the threshold.

What happens to my tax-free ISA on my death?

In theory, after death, your tax-free ISA wrapper benefits ends, and the value of the investments will be included in your estate.

However, since 6 April 2018 ISAs can retain the tax-free status for income tax and capital gains tax while an estate is being administered. This advantage extends the tax-free treatment until the earlier of the following:

• the administration of the estate is finalised
• the ISA account is closed by the executor
• three years after the ISA holder’s death has elapsed

your ISA passes to your spouse or civil partner, it will transfer without incurring IHT. In addition, if their death was on or after three December 2014 there is eligibility for a one-off additional ISA allowance equivalent to either

• the value of the deceased person’s ISA at the time of death
• or the value of their ISA when it was closed

This allows the spouse or civil partner beneficiary to inherit the deceased ISA allowance in addition to their normal ISA allowance.

ISAs in summary

• ISAs have no income tax or capital gains tax during the holder’s lifetime
• ISAs have no income tax or capital gains tax during the administration of the deceased’s estate (maximum three years)
• ISAs will be subject to inheritance tax unless they are left to a surviving spouse or civil partner
• A surviving spouse will acquire equivalent ISA allowances to the value of your ISAs at the date of your death.

If you have any questions regarding ISA’s and IHT implications, please get in touch and a member from our specialist tax team would be more than happy to help.

We also can put you in touch with independent financial advisors if you are interested in divesting your existing holdings into more IHT-efficient holdings.